Firm Competition Flashcards
Firms are said to be in perfect competition when? What industry is a good example of perfect competition?
- many firms produce identical products
- Many buyers are available to buy the products
- sellers and buyers have all necessary information to make decisions
- firms can enter and exit with no restriction
Agriculture - many sellers of the same good
What is a price taker and what industry is best used as an example?
A perfectly competitive firm is a price taker because pressure of competing firms forces them to accept the equilibrium price
Agriculture - many sellers of the same good
What will happen to a price taking firm if it raises or lowers price?
Raises Price - it will lose all sales to a competing firm
Lowers Price - it will gain all of the sales in the market
In the short run, where does a perfectly competitive firm produce?
Where profits are highest
In the long run, where does a perfectly competitive firm produce?
Where economic profits are zero and long-run equilibrium will be attained.
A single frim in a perfectly competitive market is relatively small, what does this mean? Give an example
They can enter and exit the market without a noticeable impact on quantity supplied or market price.
Small roadside produce markets - numerous vendors can come sell without an impact on market quantity or price. They simply accept the price and sell their product.
What is the one major decision a perfectly competitive firm has to make and why?
What quantity to produce.
Since the firm must accept the price for its output as determined by market demand and supply, it cannot choose the price it charges.
What demand curve does a perfectly competitive firm face and how does it affect profit?
Perfectly elastic demand curve - buyers are willing to buy any number of units at the market price.
Since they are price takers they must decide on a quantity to produce, and this quantity will decide the revenue they make, the costs they will incur, and ultimately their profits.
What is the profit maximizing choice for a perfectly competitive firm?
Profit maximization in a perfectly competitive market occurs where MR = MC
What happens in a perfectly competitive market when Price > ATC
Firms earn an economic profit and other firms will then enter the market until Price = ATC
What happens in a perfectly competitive market when Price < ATC
Firms face an economic loss and other firms will exit the market until Price = ATC
Explain the Shutdown Point and how it affects a business in the short run and the long run.
Shutdown point is the intersection of the AVC curve and the MC curve, which shows the point at which the firm would lack revenue to cover its variable costs.
In the short run if the firm can shut down and lower VC to zero but the sunk cost is the fixed cost to production. If the firm can cover VC in the short run it should continue to produce and minimize losses.
In the long run if the firm cannot increase revenues in the long run it will shut down and exit the market.
Where does a profit- maximizing firm produce and why would it not produce at a quantity where MC > MR
A profit maximizing firm is currently producing at P = MR = MC, so raising their output would reduce overall profits for every additional output produced.
What two lines intersect on a cost curve at the zero-profit point
AC = MC
What is an increasing cost industry, and what LRS curve do they face, and what happens to inputs in the market?
As the market expands, old and new firms experience increases in the cost of production.
LRS - is upward sloping as the increase in demand is greater than the increase in supply.
Companies deal with limited inputs, as demand for inputs rises so does price for the inputs.
