Module 13.1: Perfect Competition Flashcards
What are the five factors to determine where on competition spectrum an industry falls?
1) Number of firms and their relative sizes
2) Degree to which firms differentiate their products
3) Bargaining power of firms with respect to pricing
4) Barriers to entry into or exit from the indusry
5) Degree to which firms compete on factors other than price
What is perfect competition?
When firms produce identical products, and competition forces them to all sell at market price. Barrier to entry are very low and firms compete for sales only on the basis of price.
What is monopolistic competition?
products are not identical. differ in quality, features, and marketing. downward sloping demand curve, if prices increase slightly, demand may not change drastically. but large price movements will decrease demand.
What is oligopoly?
few firms competing. firms must consider the actions and responses of other firms in setting price and business strategy. high barriers to entry due to economies of scale.
What is a monopoly?
single seller of a product with no close substitutes. has the power to chose what price to sell its product.
What is a natural monopoly?
a situation where the average cost of production is falling over the relevant range of consumer demand.
What kind of demand curve does producers in perfect competition face?
in perfect competition, firms have no control over market price. Therefore, the firm’s demand schedule is perfectly elastic (horizontal).
Explain marginal revenue, price and marginal cost for a firm in perfect competition?
A firm will continue to expand production until MR = MC. MR = price because all additional units are assumed to be sold at the same price.
When should a firm in perfect competition close in the short run?
Firm should shut down when price is less than ATC and less than AVC.
What is the short-run supply curve for a firm under perfect competition?
it is the marginal cost line above the average variable cost curve.
Explain what happens when an increase in demand occurs?
Increase both equilibrium price and quantity, while a decrease in market demand will reduce both equilibrium price and quantity.
Explain what happens when an increase in supply occurs?
Increase equilibrium output and decreasing equilibrium price. End result is that a firm’s total revenue and economic profit will decrease.
