Perfect Competition Flashcards
Characteristics of perfect competition?
- Many buyers and sellers
- Sellers sell identical goods - perfect substitutes
- Each firm that is selling is too small to influence the price so each firm acts as a price taker
- Sellers and buyers are well-informed on the product
- established firms do not have an advantage over newcomers
- No barriers to entry/exit
If a firm in PC is a price taker, how is the price determined?
Through the invisible hand
What does it mean to be a price taker?
The firm can only sell at this determined price, but as many as they want
Each firm sets DC as perfectly elastic
How much do you make in PC?
Normal profit
What are the barriers to entry/exit?
There are none
What is Q*?
Profit maximising output
When demand is perfectly elastic, MR = ?
MR = MC
Show that marginal revenue = price
Marginal revenue = ∆total revenue / ∆ Q
= ∆ (P*Q) / ∆ Q
= P
What decisions can you make in the short run?
- Whether to produce or shut down
* If you produce, what quantity do you produce (Q*)
What decisions can you make in the long run?
- Expand or not
* Leave or stay
Where is the break even point?
When TR = TC
Where is Q*?
Where MR intersects with MC
When is the market efficient?
When P = MC
What are the three possibilities regarding profit in the SR?
- Making profit
- Breaking even
- Losing money
To stay in the market in SR, what needs to be true?
TR ≥ VC
or MC ≥ AVC
or P ≥ AVC
