perfect competition (final)

Question 1

define perfect competition

Answer 1

a market where there are many buyers and sellers with equal access to to all information that all elements of monopoly are absent. no single buyer can influence the price of a product, so price is set by overall market

Question 2

key characteristics of perfect competition

Answer 2

1. maximize profit and minimize loss
2. standard products
3. price takers
4. government doesn’t control prices
5. easy entry and exit

Question 3

explain demand curve for entire perfect market

Answer 3

1. demand curve slopes down
2. supply curve slopes up
3. the point where the curves meet is the equilibrium price

Question 4

explain the demand curve for a perfectly competitive FIRM

Answer 4

demand curve is horizontal. because the firm can sell any any amount of product but at market price

Question 5

equation for total cost

Answer 5

FC+VC

Question 6

equation for marginal cost/unit

Answer 6

change in total cost divided by change in quantity

Question 7

equation for average cost

Answer 7

Total cost divided by quantity

Question 8

equation for total revenue

Answer 8

quantity times price

Question 9

how to calculate profit

Answer 9

total revenue-total cost. it’s it zero it’s the break even point

Question 10

when does total profit reach peak/ maximize profit

Answer 10

MR=Price=MC

Question 11

explain why marginal revenue=price/unit

Answer 11

every time a firm sells an extra unit after reaching their maximum profit point, the marginal revenue it earns is equal to the price of the unit. as the firm has to selll at price of the market

Question 12

what is shutdown point

Answer 12

when TR=TVC

Question 13

why a firm might operate while losing money

Answer 13

high fixed costs

Question 14

how is the market supply curve determined

Answer 14

by adding horizontally the supply curves of all individual producers of that good

Question 15

when should a firm operate

Answer 15

of revenue is larger then VC

Question 16

when should a firm shutdown

Answer 16

if revenge is less then VC

Question 17

what happens when demand shift up in a market short term

Answer 17

supply curve is steeper because you can’t adjust fixed costs quickly due to short term. supply is limited and demand increases so price increases

Question 18

what happened when demand shifts up in a market long term

Answer 18

supply curve is flatter(more horizontal). they have more time to adjust their fixed imput. there is higher supply elasticity and smaller price increase

Question 19

why does supply curve shift upwards in long run market supply in relation to cost

Answer 19

the supply curve shifts upwards because as production increases, the cost of producing more goods increases due to scarcity of resources. so to cover the costs u need to increase price

Question 20

explain constant cost case

Answer 20

when demand increase, the equilibrium shifts causing an increase in quantity but no price change. the supply is constant at the price (horizontal) perfectly elastic

Question 21

explain increasing cost case

Answer 21

the long run supply curve slopes upwards due to rise in input costs and increased production. when demand shifts upwards the equilibrium price rises and quantity increases

Question 22

define economic rent

Answer 22

payment for using fixed supplies

Question 23

explain fixed supply factors earning rent

Answer 23

supply is fixed, quantity is fixed, price increases, demand increases

Question 24

explain backward bending labor supply curve

Answer 24

how individuals respond to change in wahed

Question 25

explain substitution effect

Answer 25

at lower wages people work more for money instead of leisure time

Question 26

explain income effect

Answer 26

at higher wages people work less because they already earn enough to need their needs met