Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

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

A

None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a price taker?

A

Firm that takes price as given

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are 3 examples of imperfect competition?

A

Monopoly, monopolistic competition, and oligopoly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Monopolistic competition

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Monopoly

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

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

A

None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does it mean to be a price taker?

A

Firms take prices as given

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

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

A

Many firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are 3 examples of imperfect competition?

A

monopoly, monopolistic competition, oligopoly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Monopolistic Competition

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

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

A

Electricity, tap water

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is an example of monopolistic competition?

A

Restaurants, Hotels, Hairdressers, Clothing Stores

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Monopoly

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is an example of a monopoly?

A

Tap Water

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the number of firms in perfect competition?

A

Many

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is the number of firms in monopolistic competition?

A

Many

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the number of firms in an oligopoly?

A

Few

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is the number of firms in a monopoly?

A

One

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is an example of an oligopoly?/

A

Auto Manufacturers, Cell Phone Providers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is an example of an oligopoly?/

A

Auto Manufacturers, Cell Phone Providers, Computer Manufacturing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What type of product is produced in monopolistic competitive markets?

A

Differentiated

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What type of product is produced in an oligopoly?

A

Identical or differentiated; homogeneous or heterogeneous

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What type of product is produced in a monopoly?

A

Unique

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are the barriers to entry in perfect competition?

A

None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What are the barriers to entry in monopolistic competition?

A

None

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What are the barriers to entry in an oligopoly?

A

High

35
Q

What are the barriers to entry in a monopoly?

A

Insurmountable

36
Q

What are the barriers to entry in a monopoly?

A

Insurmountable

37
Q

A perfectly competitive firm faces what kind of demand?

A

perfectly elastic

38
Q

What does the demand curve for a perfectly competitive firm look like?

A

horizontal at the market price

39
Q

What is the objective of the firm?

A

Choose output to maximize profit

40
Q

Profit Formula

A

Total Revenue - Total Cost

41
Q

Average Revenue

A

Total Revenue divided by the quantity of output sold

42
Q

Marginal Revenue

A

The change in total revenue resulting from selling one more unit of a good or service

43
Q

True or False:

A

In a perfectly competitive firm, price equals average revenue equals marginal revenue

44
Q

How does a firm maximize profit?

A

By choosing output such that marginal revenue equals marginal cost

45
Q

If an intersection of marginal cost does not equal marginal revenue at any exact level of output, which output level should the firm choose?

A

The lesser output

46
Q

True or False:

A

Marginal revenue is constant in a perfectly competitive firm

47
Q

True or False: Under perfect competition, price is equal to marginal cost

A

True

48
Q

The profit-maximizing level of output exists on a graph where…

A

the difference between total cost and total revenue is the greatest

49
Q

The difference between price and average total cost on a graph equals

A

Per-unit profit

50
Q

Total profit equals (relative to price and ATC)

A

Profit per unit times output

51
Q

What happens if price is always below average total cost?

A

The firm makes a loss

52
Q

Where is the break-even point on a graph?

A

Price (marginal cost) = average total cost

53
Q

What is profit when MC = ATC?

A

zero

54
Q

What happens to profit when price is greater than ATC?

A

The firm is making a profit

55
Q

What happens to profit when price is equal to ATC?

A

Firm is breaking even

56
Q

What happens to profit when price is less than ATC?

A

The firm is making a loss.

57
Q

What are the firm’s two options when incurring a loss?

A
  1. continue to produce

2. stop production by shutting down

58
Q

When should a firm shut down?

A

When price is less than average variable cost

59
Q

What should a firm do if price is greater than average variable cost?

A

The firm should not shut down, and should produce at a level of output where P = MC

60
Q

What is a firm’s supply curve?

A

The marginal cost curve

61
Q

Marginal cost curve shows the relationship between…

A

price and quantity supplied

62
Q

Where is the shutdown point?

A

Where MC intersects AVC

63
Q

Economic Profit Formula

A

Total Revenue - Total Explicit Cost - Total Implicit Cost

64
Q

Accounting Profit Formula

A

Total Revenue - Total Explicit Cost

65
Q

What is the incentive for firms to enter a market?

A

Firms are earning positive short-run economic profit

66
Q

What is the effect of firms entering the market?

A

Supply increases, Price falls until there is no more incentive to enter the market

67
Q

Firms continue to enter the market until

A

they earn zero economic profit

68
Q

How is profit represented graphically?

A

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
Q

When will firms leave the market?

A

When firms are experiencing negative economic profits.

70
Q

What is the effect of firms leaving the market?

A

Supply decreases, market price rises until firms break even

71
Q

Long-run competitive equilibrium

A

The situation in which the entry and exit of firms has resulted in the typical firm breaking even

72
Q

Where will price be driven in the long run?

A

Minimum point of the firm’s long-run average cost curve

73
Q

In the long run, at what price will firms supply?

A

At a price equal to the minimum point on the firm’s average cost curve

74
Q

In a perfectly competitive market, long-run price is determined by

A

supply

75
Q

What does the long-run supply curve look like?

A

Horizontal at the price equal to the minimum point on the average total cost curve

76
Q

Constant-Cost Industry

A

Industries where the production process is infinitely replicable

77
Q

How is the supply curve of a constant-cost industry represented?

A

Horizontal Supply Curve

78
Q

Increasing-Cost Industry

A

If some factor of production can not be replicated, additional firms may have higher costs of production

79
Q

Decreasing-Cost Industry

A

Additional firms might generate benefits for other firms in the market, leading additional firms to have lower costs of production

80
Q

Productive Efficiency

A

Goods and services produced at the lowest possible average total cost

81
Q

Allocative Efficiency

A

Firm produces at a level of output such that P=MC

82
Q

Perfectly competitive firms produce up to what point?

A

The point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it

83
Q

How do you determine the number of firms in a market?

A

Market equilibrium quantity of output divided by the quantity of output where marginal cost = market price

Microeconomics (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions