Perfect Competition Flashcards
Define market structure.
The competitive environment in which firms operate
What three things do we categorise markets by?
- ) Number of firms
- ) Product differentiation
- ) Barrier to entry
What is meant by a barrier to entry?
How easily a new firm can enter the market
What are the names for the four basic market structures?
- ) Perfect competition
- ) Monopoly
- ) Oligoploy
- ) Monopolistic competition
How many firms are there in a perfect competition, monopoly, oligopoly and monopolistic competition market?
Perfect competition - Many
Monopoly - One
Oligoploy - Few
Monopolistic competition - Many
What is the product differentiation in a perfect competition, oligopoly and monopolistic competition market?
Perfect competition - None
Oligoploy - Depends on the model
Monopolistic competition - Differentiated
What is the barrier to entry like in a perfect competition, monopoly, oligopoly and monopolistic competition market?
Perfect competition - None
Monopoly - A lot of them
Oligoploy - Some barriers to entry
Monopolistic competition - None
What three conditions characterise a perfect competition market?
- ) Large number of firms
- ) Identical product
- ) Any firm can enter the market freely
What is the implication of there being a large number of firms ?
Each firm has to take the market price as given and they cannot influence the market price
What type of demand curve to competitive firms face?
Perfectly elastic
In the long run what is a competitive firm’s economic profit?
0
Why is there no economic profit in the long run for competitive firms?
If there is profit in the market new firms will enter the market and so increase the supply, with excess supply the price has to decrease and so the profit also has to decrease until there is zero profit
Draw the demand curve for a competitive firm.
Picture
Why do firms have to sell their good at price P*?
Because if they charge a price above P* there will be many firm selling at the price P* so you wouldn’t get anyone buying your good
Why wouldn’t competitive firms want to charge a price below P*?
You can already sell as many units as you like at P*, so decreasing your price won’t mean you sell anymore so you only decrease your income
What are the two decisions a competitive firm faces?
What level of output, and when to shutdown
Define profit.
The difference between a firms revenue and total cost
What are the two formula for profit.
Profit = Total revenue - Total Cost Profit = operating profit - Fixed cost
Define marginal revenue.
The additional revenue from selling one additional unit of output.
What is the equation for total revenue?
TR = P X Q
In perfect competition what is the marginal revenue?
P, since the firm is a price taker
How do you find average revenue?
AR = TR / Q
In perfect competition what is the average revenue?
P
What is marginal revenue the derivative of?
Total revenue
What is the formula for marginal profit.
Marginal Revenue - Marginal Cost
Define marginal profit.
The extra profit of selling an extra unit of output
What is meant by MR>MC?
Profit increases as output increases
What is meant by MR < MC?
Profit decreases as output increases
In perfect competition what is the output decision?
To produce at the point MR = MC, and so MC=P
From MR and MC on a graph.
Picture
Why do you ignore the downgrading sloping part of the MC?
A firm will never choose an output which produces decreasing profit
What is the equation for profit?
π = TR - TC
What is the equation for profit that relates price, quantity and ATC?
π = (P - ATC) x Q
What does P* have to be smaller than to make a profit?
ATC*
If a firm decides to shut down in the short run why do they still make a loss?
Because in the short run they still have to pay a fixed cost regardless of if they are producing anything
If a firm shuts down what is the loss equal to?
The fixed cost
What two profits does a firm consider when deciding whether or not to shut down?
Operating profit and Shut down profit
What is the same as operating profit - shut down profit? And why?
TR - FC - VC - (-FC) = TR - CV
When does a firm decide to shut down?
When VC > TR
What has no relevance as to whether a firm shuts down or not? Any why?
Fixed cost, as it has to be pair regardless
What is meant by VC > TR?
This is when the total revenue no longer coves the variable cost
If TR > VC does a firm decide to shut down?
No
What does P* have to be smaller than for a firm to shut down?
AVC*
Draw MC, ATC, AVC, AVC* MR and AFC on a graph.
Picture
What box shows the operating profit or operating loss on a graph
The area between P* and AVC*
What is operating profit the same as? And why?
Producer surplus because the producer surplus is the amount of economic benefit that a producer can gain by participating in the market, and operating profit is the amount of economic profit that varies with output
In the long run what changes about the the firms supply curve?
Its part of the marginal cost curve that lies above the average total cost curve and not the average variable cost (now all costs are variable)
What is a market’s supply curve?
The horizontal sum of all firms supply curve
Which way does a markets supply curve when more firms enter the market?
To the right
