lecture 16

Question 1

what does perfect competition means?

Answer 1

• each firm can sell as much or as little as it wants at the prevailing market
  -firms are price takers
  → assumption: each firm individually is small enough and is not able to influence the market price
  → firms will choose how much to produce at the market price to maximize profits
  → firms will not be able to choose price
• firms produce homogeneous goods

Question 2

What happens to the demand curve in a perfectly competitive firm?

Answer 2

• the demand curve facing a perfectly compepetive firm is perfectly elastic at the prevailing market
• intuition:
  → if there are many firms producing identical products, and consumers can easilly switch from one firm to another, firms will be unable to benefit from attempting to sell at a price different from the prevailing market price
  → consumers will buy at the lowest price

Question 3

what is the marginal revenue?

Answer 3

the additional revenue associated with producing one more unit

Question 4

what is the marginal revenue in a perfectly competitive market?

Answer 4

• same at every quantity (constant) and equal to the prevailing market price

Question 5

what happens with profit-maximization in a perfect competition?

Answer 5

• mr=mc
• mc = P
  because the marginal revenue is constant and equal to the market price

Question 6

what is the profit maximization condition- isoprofit approach?

Answer 6

• slope of the demand curve is equal to the slope of the isoprofit curve
• this will happen at the tangency point between the isoprofit and the demand curves

Question 7

what is the individual firm’s supply curve?

Answer 7

• it is the marginal cost revenue, as long as profits are not negative
• this implies that the supply curve will be the marginal cost curve when mc > ac ( zero-economic-profit curve)
• quantity supplied by a firm will be zero when profits are negative
• positive slope

Question 8

why does the individual firm’s supply curve slope up?

Answer 8

• supply curve shown a relationship between the quantity preoduced and sold by an individual dirm and its price
  If occurs a impact of a rise in the market price, leads to a higher quantity supplied by the firm

Question 9

what is the market supply curve in a individual-firm?

Answer 9

• sum of individual firm’s supply curve
  that is, at a given price, we add up the quantity supplied by each individual firm (“horizontal” interpretation)
  or
  the industry supply curve is the industry marginal cost curve
  (“vertical” interpretation)

Question 10

what can cause the supply curve to shift?

Answer 10

• an improved production technology (shift down)
• an increase in the price of an input (shift up)
• entry of new firms (shift down)