Perfect Competition + Supply Flashcards
How can Industry Structure affect prices?
High Competition–> Lower Prices / Smaller Difference between Prices offered
What are the Main features of a Perfectly Competitive Market?
Many Buyers + Sellers
Homogenous Products- firms are Price Takers
No Barriers to Entry/Exit- Freedom of Entry/Exit (Only matters in LR)
How much can a firm sell in a perfectly competitive market?
As much as it wants at the Prevailing Market Price
P=AR=MR–> a horizontal line
Draw Profit Max in a Perfectly Competitive Market
MC Upward sloping
P=AR=MR is horizontal = P*
Intersection–> P* & Q*
When will a firm Shutdown in the SR?
If Revenue does NOT cover its Variable Costs
TR < VC => TR/Q < VC/Q => AR < AVC => P < AVC
Given the SR Shutdown condition, what is the firm’s SR Supply Curve?
S = 0 below AVC S = MC above AVC
When will a firm Shutdown in the LR?
If Revenue does NOT cover its Total Costs
TR < TC => TR/Q < TC/Q => AR < ATC => P < ATC
Given the LR Shutdown condition, what is the firm’s LR Supply Curve?
S = 0 below ATC S = MC above ATC
Derive the equation for Economic Profit/Loss for a diagram
Prof. = TR - TC => Prof. = (TR/Q - TC/Q)Q ==> Prof. = (AR - ATC)Q --> Prof. = (P - ATC)Q NOTE: If SR- change TC--> VC / ATC--> AVC
In the LR, what can affect the Competitive Equilibrium
Freedom of Entry + Exit
How does Freedom of Entry + Exit affect the LR Equilibrium?
Economic Profit–> Attracts New Firms
Economic Loss–> Existing firms Leave the market
What is the LR Equilibrium characterised by?
No Incentive for Entry/Exit
Economic Profit = 0
P = min{LRATC} = min{SRATC}
P = AR = MR = min of ATC (M.E.S)
In SR- what is the Industry Supply Curve + where is it?
Sum of all MC curves in the Industry
It is Above AVC
S=Sum(i) of MC, ‘i’ firms
Why can the position of the LR Industry Supply Curve change?
Firms can Leave or Enter the Market
What happens to the LR Industry SC if Firms Enter the market?
More MC Curves to Sum–> Supply shifts to Right- Increase
