Perfect Competition Flashcards
4 main characteristics of perfect competition?
Many buyers and sellers
Homogenous product
Perfect knowledge
Freedom of entry and exit
What is producer surplus on a perfect competition graph?
The sum of differences between the market price (demand) and the marginal cost, over all units produced
In the short run when will a firm shut down?
When price < AVC
How can you tell when a firm is a price taker?
When AR = MR = P
What is the supply curve of a firm in PC in short run?
Its’ MC curve above AVC (below this point it shuts down
What is short run perfect competition?
A period of time in which no new firms can enter the market
What is long run perfect competition?
A period of time which is long enough to allow new firms to enter the market
Long run assumptions under PC? (3)
‘Typical’ firm in the market
All firms have same cost curves
Cost curves made assuming constant costs on input prices and technology levels
Why is the long run equilibrium at the bottom of the LRATC curve?
1) Firms outside market see SNP
2) they join the market -> increase in supply
3) this forces the price down tf SNP is diminished - none in LR
What is a firms long run supply curve in PC?
The portion of the LRMC curve that is above the LRATC curve
Below this point they will shut down (P
Why does LRATC = LRAVC in the long run?
Because in the long run all inputs are variable therefore all costs are variable too
Mechanism for constant costs, long run market supply?
1) increase demand -> increase price -> increase profit
2) firms see SNP, join market tf increase supply -> decrease price back to original
Industry output has increased due to new firms joining
LRMS curve is horizontal
Mechanism for increasing costs, long run market supply?
Same, except for due to increased demand for factors of production costs rise as new firms join (increase in LRATC and LRMC) tf even with supply increase final costs have risen and prices too
Upward sloping LRMS curve
Mechanism for decreasing costs, long run market supply?
Same, except new firms lead to better infrastructure, more highly trained workers etc -> falling costs (fall in LRATC and LRMC), firms join until profit = 0 which is lower than before - q has increased, costs and price have fallen
Downward sloping LRMS curve
