Perfect competition

Question 1

What are the characteristics of a perfectly competitive market?

Answer 1

-Many Sellers & Buyers
- Each seller’s good is exactly the same as any other seller’s good
- Sellers & Buyers are “small” relative to the size of the market
“Small”: Generally easy entry & exit firms

Question 2

What are some characteristics of short run perfect competition?

Answer 2

• Some Inputs are fixed and some are variable.
  
  • E.g Capital is fixed & Labour is variable
• Variable Costs depend on how much is produced = The sum of all marginal costs
• Fixed Costs must be paid regardless of level of output = In the short run these are sunk costs
• The number of firms in a market is fixed

Question 3

Since I’m the short run many firms are potentially producing each with their own supply curve, How do you find the market short run supply curve and what/how can you determine the short run equilibrium price?

Answer 3

First make
P = MC
Then you’ll find Q and you multiply the number of firms in your market by the individual q equation and you have your market supply curve

Question 4

How does a firm make profits in the short run?

Answer 4

It take the market price as given and supplies until it produces the amount Q, the largest quantity such that MC (Q)

Question 5

What are the two questions to ask considering Profit Maximization?

Answer 5

1. If I produce, how much should I produce?
   
   • whatever amount as long as MB>MC
   • MB = MR = P produces as long as P>= MC
   • Q is the largest quantity such that MC (Q)

Question 6

What is the difference between a short run shut down and a short run loss?

Answer 6

A loss occurs when a firm is making just enough to cover total variable costs ( AR = AVC < TC) & P< unit cost, and has the decision of whether to shut down or hit but in the short run firm should continue to produce if P> AVC
And shutdown is when price is then less than average variable costs, firms in the short run would have to shut down then

Question 7

What is normal profit?

Answer 7

When TC = TR and is the minimum profit needed for firms to remain competitive in the long run

Question 8

What does a short run economic shut down look like graphically?

Answer 8

P < AVC (Q)

Upward facing ATC and AVC curves with ATC above AVC and MC intersecting both of them but Price is below the AVC

Question 9

What does a short run economic loss look like graphically?

Answer 9

AVC(Q)

Question 10

What is short run shut down?

Answer 10

-Firm should produce nothing if:
TR(Q) = PxQ < TVC(Q)
P< TVC
MB

Question 11

When does a firm experience a loss?

Answer 11

TR(Q) = PxQ < TC(Q)
-(Profit is negative)
TVC(Q)

Question 12

What do short run profits look like?

Answer 12

TR(Q*)-TC(Q*)=
{PxQ*} - {[AVC(Q*)xQ*]-TFC} 
When Q*= 0, that is -TFC, therefore no revenue variable costs and you only have the sunk fixed costs 
When Q* = Q 
TR(Q) - TC(Q)=
{PxQ} - {[AVC(Q)xQ] - TFC}

Question 13

What are the major differences between how firms operate in the short run and in the long run?

Answer 13

In the long run

• All Inputs are variable
• firms can enter and exit as they please but w/ short run the # of firm’s is fixed so they’re only deciding how much to produce ( if anything)

Question 14

What is the key implication of the difference between the short-run and the long run?

Answer 14

The key implication is that supply is more elastic in the long term than the short term.

Question 15

What are two assumptions we can make about the long run?

Answer 15

1. Firms have access to the same technologies & input prices
   
   • this makes the long run supply curve “horizontal” at the minimum of the long run ATC curve
2. Input prices don’t change as total quantity transacted changes

Question 16

What profits are made in the long-run?

Answer 16

No economic profits are made, the goal is just to make a normal profit where TR = TC

Question 17

What does the single firm size have to do with the firm’s Long Run ATC?

Answer 17

The firm size (specifically there is one particular size) that minuses a firm’s long run ATC and is derived from a short run ATC curve for a firm operating at that size.

Question 18

What happens when another firm enters the market?

Answer 18

It shifts the supply curve and reduces the equilibrium price