perfect competition (final) Flashcards
define perfect competition
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
key characteristics of perfect competition
- maximize profit and minimize loss
- standard products
- price takers
- government doesn’t control prices
- easy entry and exit
explain demand curve for entire perfect market
- demand curve slopes down
- supply curve slopes up
- the point where the curves meet is the equilibrium price
explain the demand curve for a perfectly competitive FIRM
demand curve is horizontal. because the firm can sell any any amount of product but at market price
equation for total cost
FC+VC
equation for marginal cost/unit
change in total cost divided by change in quantity
equation for average cost
Total cost divided by quantity
equation for total revenue
quantity times price
how to calculate profit
total revenue-total cost. it’s it zero it’s the break even point
when does total profit reach peak/ maximize profit
MR=Price=MC
explain why marginal revenue=price/unit
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
what is shutdown point
when TR=TVC
why a firm might operate while losing money
high fixed costs
how is the market supply curve determined
by adding horizontally the supply curves of all individual producers of that good
when should a firm operate
of revenue is larger then VC
when should a firm shutdown
if revenge is less then VC
what happens when demand shift up in a market short term
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
what happened when demand shifts up in a market long term
supply curve is flatter(more horizontal). they have more time to adjust their fixed imput. there is higher supply elasticity and smaller price increase
why does supply curve shift upwards in long run market supply in relation to cost
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
explain constant cost case
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
explain increasing cost case
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
define economic rent
payment for using fixed supplies
explain fixed supply factors earning rent
supply is fixed, quantity is fixed, price increases, demand increases
explain backward bending labor supply curve
how individuals respond to change in wahed
explain substitution effect
at lower wages people work more for money instead of leisure time
explain income effect
at higher wages people work less because they already earn enough to need their needs met
