Market Structures I: Perfect Competitive Market Flashcards
What does the Marginal revenue of a perfect competition equal to?
It will normally equal to price
(the MR line is corresponding to the horizontal quantity line and perpendicular to the vertical price line)
When is long-run equilibrium achieved in perfect competition
In the long-run, the firm will be at equilibrium when the excess profits have been exhausted and no new firms are attracted to enter the industry and when there are no loses to force the firm will be in the long-run equilibrium when it is only enjoying normal profits. The long-run marginal cost of the firm equals average cost and equal marginal revenue (LMC=LAC=MR=P, that is, at the point where long run AC is at its minimum.
What is equilibrium
It is a situation where the firm does not wish to change the size of its output.
Describe the demand curve of a Perfectly competitive market structure.
Demand curve of individual firm would be infinitely elastic, indicating that the firm can sell any amount of output at the prevailing market price
Characteristics of Perfect Competition
- Large number of buyers and sellers in the market. Each seller supplies only a small part of the total quantity offered in the market.
- Product Homogeneity. The product of any one seller is identical to the product of every other firm in the market.
- Free entry and exit of firms:- there is no barrier to entry or exit from sellers and buyers are free to join and leave whenever they want.
- Profit Maximization motive. All firms in the industry aim to maximize profit. No other goals are pursued.
- There is no government regulation. Government does not interfere with the market through imposing tariffs, subsidies e.t.c
- Free mobility of factors of production:- Factors of production are free to move from one firm to another throughout the economy.
- Perfect knowledge:- All sellers and buyers have complete knowledge of the conditions of the market.
What determines price in a perfect competitive market?
Market forces of demand and supply
In the short run, how does the position of the average curve affect the firm
Depending on the position of the AC, the firm can make excess profit or loss. (below MC=MR- profits, above MC=MR-losses)
Factors that determine the long-run equilibrium in perfect competitive markets.
Since entry to the industry is free, supernormal profits attract other firms to enter the industry. Or alternatively, the existence of excess loss would cause some firms to exit the industry. As new firms enter the industry, supply also increases. Due to the increased supply, the market price will fall. The higher profits that were being enjoyed by the firms will start to drop.
What is normal profits?
A normal profit is the rate of returns on capital just sufficient to provide capital investments necessary to develop and operate the firm.
Describe short-run equilibrium in perfect competitive market structure
The point of equilibrium of a firm is when the firm is making the highest profit and this is at a point where the marginal cost equals marginal revenue (MC=MR)
