Perfect Competition Flashcards
A market structure characterized by the interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogeneous, product. Sellers are price takers, can sell as much as they want, and can easily enter and exit the market.
Perfect competition
Four characteristics of a perfect market
- Large number of buyers and sellers
- Products are standardized
- Producers are price takers
- Entry and exit is easy
The change in a firm’s total revenue that results from a one-unit change in output produced and sold. Equals price and average revenue in a perfectly competitive market
Marginal Revenue
Revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold
average revenue
When consumers are relatively sensitive to changes in price, is demand elastic or non-elastic
elastic
What happens to elasticity as more substitutes are available
Elasticity increases
What does the demand curve look like for an individual firm in a perfectly competitive market?
A flat horizontal line
Firms that take or accept the market price and have no ability to influence that price.
Price takers
Rule that state produce at the quantity at which marginal revenue = marginal cost
provit-maximizng rule
The level of profit that occurs when total revenue is greater than total cost.
Economic profit
The level of profit that occurs when total revenue is equal to total cost
Normal profit
The level of profit that occurs when total revenue is less than total cost
loss
The price below which a firm will choose not to operate in the short run. Numerically, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost.
Shutdown point
When should a firm shutdown production in the shortrun
When the products price falls below the average variable cost of production
A supply curve that represents the short-run relationship between price and quantity supplied.
Short-run supply curve
Where is the short-run supply curve for a perfectly competitive firm
The portion of the marginal cost curve at or above the minimum point of the variable cost curve
A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit.
long-run equilibrium
Producing output at the lowest possible average total cost of production
Productive efficiency
Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost.
allocative efficiency
A supply curve that represents the long-run between price and quantity supplied
long-run supply curve
An industry in which the firms’ cost structures do not vary with changes in production
constant-cost industry
An industry in which the firms’ cost decreases with expanded output and the long-run market supply curve slopes downward
decreasing-cost industry
An industry in which the firms’ cost increases with expanded output and the long-run market supply curve slopes upward
increasing-cost industry
