MS: Perfect Competition

Question 1

Features of a Perfectly Competitive Market

Answer 1

• There are many buyers and sellers within the market.
• The goods offered by the various sellers are largely the same.
• Firms are price takers.
• Firms can freely enter or exit the market.
  Usually the actions of a single buyer or seller in the market have negligible impact on the market price where buyers and sellers must accept the price determined by the market

Question 2

Marginal Revenue

Answer 2

Difference in total revenue from an additional unit sold:
- MR = ∆TR/∆Q
When there are competitive firms, MR = the price of the good

Question 3

Economic Profit

Answer 3

TR - TC
- Which includes both implicit and explicit costs (all opportunity costs)

Question 4

Accounting Profits

Answer 4

TR - Firms explicit costs only
- When the firms exceeds the explicit and implicit costs, the firm starts earning economic profit.

Question 5

Profit Maximization

Answer 5

• MR = MC profits are maximised
• MR > MC firm should increase quantity to increase profit
• MC > MR firm should decrease quantity to increase profit

Question 6

Normal Profit

Answer 6

The amount needed to keep factors of production in their current use.