Perfect Competition

Question 1

Characteristics of Perfect Competition

Answer 1

Many buyers and sellers

Standardized product

Price takers

Free entry and exit

Question 2

Price-Taking Producer and Consumer

Answer 2

Actions have no effect on market price of the good they buy/sell

Question 3

Standardized Product

Answer 3

Consumers view products as identical across different sellers

Question 4

Free entry and exit

Answer 4

New producers can easily enter and leave industries

Question 5

Profit Maximization

Answer 5

Producing where marginal cost equals marginal revenue

(MR=MC)

Question 6

Profit, Break-Even, Loss

Answer 6

Total Revenue (TR), Total Cost (TC)

Profit: TR > TC

Break-Even: TR = TC

Loss: TR < TC

Question 7

Short Run v. Long Run Profitability

Answer 7

Short run:
- Can make profit, break even, or incur loss
- Market conditions can change and there is little to no time for adjustment
- Firms will continue operating even if making loss as long as they can cover variable costs

Long run:
- Zero economic profit
- If firms are profitable in short run, new firms will enter the market, increasing supply and reducing prices (lose profit)
- If firms incurr losses in short-run, firms will exit market, reducing supply and increasing prices (make up loss)
- Entry and exit of firms leads to a point where no firms earns extra profit

Question 8

Shut-Down Decision

Answer 8

Firm should shut down if price falls below minimum AVC

If you cannot cover variable costs, you cannot work

Question 9

Supply Curve in Perfect Competition

Answer 9

Firm’s supply curve is marginal cost curve above shut-down point

Question 10

Long-Run Industry Supply Curve

Answer 10

More elastic than short-run supply curve

Reflects entry and exit of firms