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Microeconomics > Lecture 8 - Firms In Perfectly Competitive Markets > Flashcards

Lecture 8 - Firms In Perfectly Competitive Markets Flashcards

1
Q

What does a firm’s market power depend on?

A

Degree of market competition

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2
Q

In perfectly competitive markets, how much market power do firms have?

A

None

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3
Q

What is a price taker?

A

Firm that takes price as given

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4
Q

What 3 assumptions underlie perfect competition?

A
  1. Many small firms that produce identical products
  2. All firms are price takers
  3. There are no barriers to entry
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5
Q

What are 3 examples of imperfect competition?

A

Monopoly, monopolistic competition, and oligopoly

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6
Q

What are 3 characteristics of imperfect competition?

A
  1. Firms have some degree of market power and can determine prices strategically
  2. Products may or may not be identical
  3. Firms may employ non-price competition (advertising or other forms of product differentiation)
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7
Q

Monopolistic competition

A

Many small firms each producing a differentiated product. No barriers to entry. Example: market for polo shirts

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8
Q

Monopoly

A

A single firm producing a product with no close substitutes. Insurmountable barriers to entry prevent competitors from entering the market.

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9
Q

Oligopoly

A

A few sellers of a product. Product may be identical or differentiated. Products may be homogeneous or heterogeneous. There are significant barriers to entry. Example: manufacturing computers

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10
Q

How much market power do firms have in perfectly competitive markets?

A

None

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11
Q

What does it mean to be a price taker?

A

Firms take prices as given

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12
Q

What 3 assumptions underlie perfect competition?

A
  1. Many small firms that produce identical products
  2. All firms are price takers
  3. There are no barriers to entry
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13
Q

True or False: In perfectly competitive markets, there is no advertising or other forms of product differentiation. Why/Why not?

A

True. Since products are identical, one firm advertising for their product is advertising for all firms in that markets

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14
Q

Which is more competitive: markets with a few firms or markets with many firms?

A

Many firms

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15
Q

What 3 assumptions underlie Imperfect Competition?

A
  1. Firms have some degree of market power and determine prices strategically
  2. Products may or may not be standardized (identical)
  3. Firms may employ non-price competition
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16
Q

What are 3 examples of imperfect competition?

A

monopoly, monopolistic competition, oligopoly

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17
Q

Monopolistic Competition

A

Many small firms each producing a differentiated product. They are similar but not perfect substitutes. No barriers to entry.

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18
Q

Homogeneous Product

A

A product that can not be distinguished from competing products from different suppliers. Product has essentially the same physical characteristics and quality as similar products from other suppliers. One product can easily be substituted for another.

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19
Q

What is a market with a homogeneous product? (2)

A

Electricity, tap water

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20
Q

What is an example of monopolistic competition?

A

Restaurants, Hotels, Hairdressers, Clothing Stores

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21
Q

Monopoly

A

A single firm producing a product with no close substitutes; insurmountable barriers to entry prevent competitors from entering the market

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22
Q

What is an example of a monopoly?

A

Tap Water

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23
Q

What is the number of firms in perfect competition?

A

Many

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24
Q

What is the number of firms in monopolistic competition?

A

Many

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25
What is the number of firms in an oligopoly?
Few
26
What is the number of firms in a monopoly?
One
27
What is an example of an oligopoly?/
Auto Manufacturers, Cell Phone Providers
28
What is an example of an oligopoly?/
Auto Manufacturers, Cell Phone Providers, Computer Manufacturing
29
What type of product is produced in monopolistic competitive markets?
Differentiated
30
What type of product is produced in an oligopoly?
Identical or differentiated; homogeneous or heterogeneous
31
What type of product is produced in a monopoly?
Unique
32
What are the barriers to entry in perfect competition?
None
33
What are the barriers to entry in monopolistic competition?
None
34
What are the barriers to entry in an oligopoly?
High
35
What are the barriers to entry in a monopoly?
Insurmountable
36
What are the barriers to entry in a monopoly?
Insurmountable
37
A perfectly competitive firm faces what kind of demand?
perfectly elastic
38
What does the demand curve for a perfectly competitive firm look like?
horizontal at the market price
39
What is the objective of the firm?
Choose output to maximize profit
40
Profit Formula
Total Revenue - Total Cost
41
Average Revenue
Total Revenue divided by the quantity of output sold
42
Marginal Revenue
The change in total revenue resulting from selling one more unit of a good or service
43
True or False:
In a perfectly competitive firm, price equals average revenue equals marginal revenue
44
How does a firm maximize profit?
By choosing output such that marginal revenue equals marginal cost
45
If an intersection of marginal cost does not equal marginal revenue at any exact level of output, which output level should the firm choose?
The lesser output
46
True or False:
Marginal revenue is constant in a perfectly competitive firm
47
True or False: Under perfect competition, price is equal to marginal cost
True
48
The profit-maximizing level of output exists on a graph where...
the difference between total cost and total revenue is the greatest
49
The difference between price and average total cost on a graph equals
Per-unit profit
50
Total profit equals (relative to price and ATC)
Profit per unit times output
51
What happens if price is always below average total cost?
The firm makes a loss
52
Where is the break-even point on a graph?
Price (marginal cost) = average total cost
53
What is profit when MC = ATC?
zero
54
What happens to profit when price is greater than ATC?
The firm is making a profit
55
What happens to profit when price is equal to ATC?
Firm is breaking even
56
What happens to profit when price is less than ATC?
The firm is making a loss.
57
What are the firm's two options when incurring a loss?
1. continue to produce | 2. stop production by shutting down
58
When should a firm shut down?
When price is less than average variable cost
59
What should a firm do if price is greater than average variable cost?
The firm should not shut down, and should produce at a level of output where P = MC
60
What is a firm's supply curve?
The marginal cost curve
61
Marginal cost curve shows the relationship between...
price and quantity supplied
62
Where is the shutdown point?
Where MC intersects AVC
63
Economic Profit Formula
Total Revenue - Total Explicit Cost - Total Implicit Cost
64
Accounting Profit Formula
Total Revenue - Total Explicit Cost
65
What is the incentive for firms to enter a market?
Firms are earning positive short-run economic profit
66
What is the effect of firms entering the market?
Supply increases, Price falls until there is no more incentive to enter the market
67
Firms continue to enter the market until
they earn zero economic profit
68
How is profit represented graphically?
base equal to the​ profit-maximizing quantity​ (the quantity where the market price equals the marginal cost of​ production) and a height equal to the profit margin.
69
When will firms leave the market?
When firms are experiencing negative economic profits.
70
What is the effect of firms leaving the market?
Supply decreases, market price rises until firms break even
71
Long-run competitive equilibrium
The situation in which the entry and exit of firms has resulted in the typical firm breaking even
72
Where will price be driven in the long run?
Minimum point of the firm's long-run average cost curve
73
In the long run, at what price will firms supply?
At a price equal to the minimum point on the firm's average cost curve
74
In a perfectly competitive market, long-run price is determined by
supply
75
What does the long-run supply curve look like?
Horizontal at the price equal to the minimum point on the average total cost curve
76
Constant-Cost Industry
Industries where the production process is infinitely replicable
77
How is the supply curve of a constant-cost industry represented?
Horizontal Supply Curve
78
Increasing-Cost Industry
If some factor of production can not be replicated, additional firms may have higher costs of production
79
Decreasing-Cost Industry
Additional firms might generate benefits for other firms in the market, leading additional firms to have lower costs of production
80
Productive Efficiency
Goods and services produced at the lowest possible average total cost
81
Allocative Efficiency
Firm produces at a level of output such that P=MC
82
Perfectly competitive firms produce up to what point?
The point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it
83
How do you determine the number of firms in a market?
Market equilibrium quantity of output divided by the quantity of output where marginal cost = market price

Microeconomics (8 decks)

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