Perfect Competition

Question 1

Price Taker

Answer 1

Any individual within a market (buyer or seller) who takes the market price as given. contrast with Price Maker.

Question 2

Concentration

Answer 2

A description (or measure) of the number of firms operating within a market and their relative market shares.

Question 3

Homogeneous Goods

Answer 3

Goods or services that consumers regard as being identical in every way (consumer do not distinguish between goods on the basis of producer).

Question 4

Barriers to Entry

Answer 4

Legal, technical or strategic obstacles that prevent firms from freely entering a market.

Question 5

Perfectly Competitive Market

Answer 5

• A large numbers of small firms (low concentration).
• Firms produce products that consumers regard as being identical (homogeneous goods).
• Both firms and consumers take the market price as given (price takers).
• There are low barriers to entry (and exit) allowing firms to freely move in and out of the market in the long-run.

Question 6

Profit Maximisation

Answer 6

In microeconomics we assume that firms are motivated by the desire to earn profits.
Profit = MR - MC
Set derivative equal to zero
Profit maximising condition is MR = MC

Question 7

Profit

Answer 7

Total Revenue – Total Costs

Question 8

MR = MC

Answer 8

The cost of producing one more unit is exactly equal the revenue it generates

Question 9

MR > MC

Answer 9

Producing one more unit generates more revenue than costs increasing profits.

Question 10

MR < MC

Answer 10

Producing one more unit generates more cost than revenue reducing profit.

Question 11

Short-Run Profit Maximisation

Answer 11

In a perfectly competitive market each unit sold generates additional revenue equal to the market price.
The profit maximising rule is for a firm to select its quantity such that MC = P.

Question 12

Breakeven Point

Answer 12

P = MC = ATC

Question 13

Short-Run Loss Minimisation

Answer 13

Loss = (ATC – P)×Q

Question 14

Sunk Costs

Answer 14

The costs associated with a fixed input that have already been incurred (or committed to) and therefore cannot be avoided.

Question 15

Shutdown

Answer 15

The situation in which a firm ceases all operations, reducing its output to zero.
Shutdown occurs when P < AVC

Question 16

Long-Run Equilibrium

Answer 16

In the long-run all inputs are variable and firms are free to enter or exit a market. Firms enter markets in which firms are earning economic profits and exit markets if they are incurring losses.
The long-run equilibrium occurs where firms break even (earn zero economic profit) eliminating the incentive for firms to enter or exit.

Question 17

Allocative Efficiency

Answer 17

Consumers purchase successive units of a product until the marginal benefit from the last unit consumed is equal to the price of the product.
In a perfectly competitive market firms produce until the marginal cost of the last unit produced is equal to the price.
It follows that in both the short-run and long-run a perfectly competitive market achieves allocative efficiency.
(Failure to achieve allocative efficiency is indicated by the presence of a dead weight loss.)

Question 18

Productive Efficiency

Answer 18

When the prices of the factors of production are fixed, minimising the average cost of production is equivalent to minimising the per unit resource usage.
All firms produces at the minimum of their average total cost in the long-run equilibrium of a perfectly competitive market.
In the short-run firms may produce a quantity that is less than, equal to, or greater than the minimum efficient scale, and thus productive efficiency is not typically achieved in the short-run.