Perfect Competition Flashcards
1
Q
Points of interest on cost curve graph for perfect competition
- Productive efficiency
- Allocative efficiency
- Break even points
- Close down level
- Loss minimization
- Profit maximisation
- Cost of profit maximisation
A
- ATC = MC
- MC = MR
- ATC = AR
- AVC = AR
- ATC = MC
- MC = MR
- See graph
![](https://s3.amazonaws.com/brainscape-prod/system/cm/317/436/447/a_image_thumb.jpg?1456345736)
2
Q
Assumptions perfect competition:
- number of firms
- price control
- barriers to exit/entry
- product type
- dependence
- economic profit short run
- economic profit long run
A
- very many
- none (price taker)
- none
- homogenous (perfect substitute)
- independent
- possible
- none
3
Q
demand curve for a perfectly competitive firm
A
![](https://s3.amazonaws.com/brainscape-prod/system/cm/317/436/449/a_image_thumb.jpg?1456344644)
4
Q
Explain why a perfectly competitive market cannot make profit in the long run. (barriers to entry)
A
- no barriers to entry
- if earning profits other firms will enter the market
- as firms enter market supply will shift to the right (number of firms increase)
- marginal revenue decreases because firms are price takers
- firms reduce output to where MC = MR
- market moves to long-run equilibrium where firms break even
5
Q
Explain why a perfectly competitive firm cannot make profit in the long run. (barriers to exit)
A
- no barriers to exit
- if economic losses some firms will leave the market
- supply curve shifts to the left
- remaining firms have losses eliminated because of higher price
- firms break even at this equilibrium price
6
Q
Why do perfectly competitive firms not close down as soon as make economic loss?
A
- firms want to minimize loss when price falls below the average cost of production
- continue producing at MC = MR until loss is greater than TFC
- when loss at MC = MR quantity larger than TFC will close down