Perfect Competition

Question 1

Perfect Competition

Answer 1

Market Structure

Question 2

Perfect Competition Components

Answer 2

of Firms: Many
Nature of Product: Identical Products
Entry: No barriers
Firm’s Control over Price: None

Question 3

Monopolistic Competition

Answer 3

of Firms: Many
Nature of the product: Similar but not Identical
Entry: Few Barriers
Firm’s Control over Price: Some

Question 4

Oligopoly

Answer 4

of Firms: Few
Nature of the Product: Identical or similar
Entry: Many barriers
Firm’s Control over Price: Some

Question 5

Why do we study Perfect Competition?

Answer 5

Benchmark against which other structures are compared

Approximate Description by a number of industries

Question 6

Shutdown

Answer 6

A firm’s decision to stop production when market price drops below average variable cost for the profit maximizing Q (where P = MC). Firms that shut down continue to incur fixed costs (e.g., pay rent/capital costs of fixed production factors).

Question 7

Exit (In the Long Run)

Answer 7

A firm’s decision to leave the industry entirely. Firms that exit no longer incur any fixed costs

Question 8

Exit and Entry

Answer 8

Firms exit the industry when their economic profit is negative ( if P P^BE)

Question 9

Efficient Scale of Production

Answer 9

In the long

Question 10

*Break Even Price

Answer 10

The price at which a seller earns zero profit when producing the profit maximizing quantity , Break Even Price = Average Cost

Question 11

*Supply Decision

Answer 11

Price = Marginal Cost

Question 12

Short Run Decision

Answer 12

The firm continues to operate in the short run if, at the profit-maximizing quantity (such that P=MC), the price of output exceeds the average variable cost.

Question 13

*Short Run: Shape of Supply Curve

Answer 13

For a competitive firm with an upward sloping marginal cost curve, the competitive firms’ short-run supply curve is identical to that part of the short-run marginal cost curve that lies above the average variable cost curve.

Question 14

*Shape of the Short-Run Industry Supply Curve

Answer 14

The short-run industry supply curve is the horizontal sum of all firms’ short-run supply curves. The industry supply curve is more elastic than individual supply curves.

Question 15

*Industry in Equilibrium

Answer 15

When individual firms (in a perfectly competitive industry) maximize their profits then the industry is in equilibrium.

Question 16

*Changing Fixed Costs

Answer 16

Because a change in fixed costs affects neither MC nor AVC, it has no effect on short-run / industry supply

Question 17

*Changing Variable Costs

Answer 17

Because a change in variable costs affects both MC and AVC, it will have an effect on equilibrium price and quantity.

Question 18

*Long Run: Firm’s Supply Curve Part 1

Answer 18

As long as firm remains in the industry, the long-run supply curve is identical to the long-run marginal cost curve. The firm’s supply curve is therefore more elastic in the long run than in the short run.

Question 19

*Long Run Adjustments

Answer 19

In the long run the firm can adjust all production inputs, it can react to price changes in the long run more than in the short run and produce a given item at lower marginal cost than in the short run.

Question 20

*Exit

Answer 20

When the market price is below the firm’s average cost, the firm earns a negative profit and wants to exit the industry.

Question 21

*Shape of the Firm’s Long-Run Supply Curve

Answer 21

A competitive firm’s long-run supply curve is identical to that part of the firm’s long-run marginal cost curve that lies about its long-run average cost curve (LRAC).

Question 22

Economic Profit

Answer 22

Total revenue minus total costs, including opportunity costs of being in another industry. Accounting profits in the relevant industry minus the accounting profits of the second-best industry

Question 23

Minimum Efficient Scale; Efficient Scale of Production

Answer 23

Level of output Q minimizing the firm’s long-run average costs. The firm’s long-run output

Question 24

*Long Run: Shape of Industry Supply Curve

Answer 24

The long-run industry supply curve is flat at the break-even price, Long Run Supply = Break Even Price

Question 25

*Zero- Profit Condition

Answer 25

In long-run equilibrium in a constant-cost industry, all firms earn zero economic profit.

Question 26

*Long-Run Effect of Demand

Answer 26

A shift in demand has no effect on the long-run equilibrium price (yet an effect on quantity). Long-run equilibrium prices are determined by the supply side, not the demand side.

Question 27

*Short-Run Firm Supply

Answer 27

The firm’s short-run supply curve is identical to that part of the short-run marginal cost curve that lies above the average variable cost curve.

Question 28

*Short-Run Industry Supply

Answer 28

The short-run indsutry supply curve is the horizontal sum of all firms’ short-run supply curves. The industry supply curve is more elastic than individual supply curves.

Question 29

*Long-Run Firm Supply

Answer 29

A competitive firm’s long-run supply curve is identical to that part of the firm’s long-run marginal cost curve that lies above its long-run average cost curve.

Question 30

*Long-Run Constant-Cost Industry Supply

Answer 30

In long-run equilibrium in a constant-cost industry, the long-run supply curve is flat at the break-even price. All firms earn zero economic profit.

Question 31

*Long-Run supply in an Increasing-Cost Industry

Answer 31

In an increasing-cost industry, the industry long-run supply curve slopes upward

Question 32

*Long-Run Supply in a Decreasing-Cost Industry

Answer 32

In a decreasing-cost industry, the industry long-run supply curve slopes downward.