Perfect Competition Flashcards
Economic profit
Total Revenue - Total Costs
Total Cost
Explicit Costs + Implicit Costs
Accounting profit
Total Revenue - Explicit costs
Normal Profit
The opportunity costs of the resources owned by the firm
Conditions for perfect competition
- Firms sell a standardized product
- Firms are price takers
- Free entry and exit, with perfectly mobile factors of production in the long run
- Firms and consumers have perfect information
Shutdown condition
If the price falls below the minimum of average variable costs, the firm should shut down in the short run
Allocative efficiency
A condition in which all possible gains from exchange are realized
Producer Surplus
- The rand amount by which a firm benefits from producing a profit maximizing level of output
- Different between PQ & AVCQ
- Or the area between P and MC curves
- Aggregate producer surplus is the area between the market price and the supply curve
A step along the path towards the long run equilibrium
Entry of new firms causes supply to shift rightwards, lowering the price
The lower price causes existing firms to adjust their capital stocks downwards, giving rise to new short run average cost and marginal cost curves (MC shifts left and AC shift down and left)
Long run equilibrium
- Price reaches the minimum point of the LAC-curve
- All firms has moved to the capital stock size that gives rise to a short run average total cost curve that is tangent to the LAC curve at its minimum point
This is known as the break even point for a firm
Economic profits are zero
Constant cost industry
As production increases the LAC stays constant
Increasing cost industry
As production increases LAC increases
Decreasing cost industries
As production increases LAC decreases
Pecuniary diseconomy
A rise in production cost that occurs when an expansion of industry output causes a rise in the prices of inputs
Pecuniary economy
A fall in production cost that occurs when expansion of industry output causes a drop in the prices of inputs
