Market Structure and Perfect Competition

Question 1

Perfect Competition

Answer 1

Demand = MR = Average Revenue = Price
-Firm does not need to lower price to sell one more unit of output
-Optimal point for firm is where MC = MR
-> Think of Marginal profit as MR(q) - MC(q) and that is based on variable costs so is either loss minimizing or profit maximizing

Question 2

Profit

Answer 2

pi = (P-ATC) * Q

Question 3

Shut down decision

Answer 3

Shut down when Variable cost is not covered
P < AVC
TR < VC

Question 4

Two ways to measure PS

Answer 4

*note VC = area below MC curve
1) PS = area below price and above MC
-Profit = PS - FC
2) PS = TR - VC
*VC = q *AVC

Question 5

Perfect Competition in the Long-Run

Answer 5

3 Key Points:
1) All costs are variable thus LR ATC = LR AVC, as all costs are variable in long run
2) Easy entry, easy exit
-Profit is driven to zero
-P = min ATC
3) LR industry supply curve is horizontal at minimum average cost

Question 6

Long-Run Competitive Equilibrium

Answer 6

P =min ATC
-Profit pulls firms in and out which drives price back to minimum ATC as profits become more or less attractive to firms