Econ 3 Chapter 8 Part 1

Flashcards about perfect competition

What conditions define perfect competition?

Many firms produce identical products; Many buyers and sellers are available; Sellers and buyers have all relevant information; Firms can enter and leave the market without restrictions.

What does it mean for a firm to be a 'price taker' in perfect competition?

The firm must accept the prevailing equilibrium price in the market.

What are some examples of markets that approximate perfect competition?

Agricultural commodities (corn, wheat, soybeans, milk, etc.) and mineral resources (crude oil, gold, silver, etc.).

In a perfectly competitive market, what happens if firms are enjoying positive economic profits?

New firms will enter the market.

In a perfectly competitive market, what happens if firms are experiencing negative economic profits?

Existing firms will leave the market.

In a perfectly competitive market, what occurs at equilibrium regarding firms entering or leaving?

No firms wish to leave or enter the market.

In the long run, what level of economic profit do price takers enjoy?

Zero economic profit.

What is the primary decision a perfectly competitive firm must make?

The quantity of product to produce

What does the quantity of product a firm decides to produce determine?

Total revenue, total costs, and profits.

How does a firm decide the quantity of product to produce?

The firm will choose to produce the quantity of product that maximizes its profit.

What is marginal revenue?

The additional revenue gained from selling one more unit of a product.

For a firm in perfect competition, what is unique about its marginal revenue curve?

It is the same as the firm's demand curve.

Why does marginal revenue not change as a firm produces more output in perfect competition?

Because each firm is too small to change the total quantity supplied in the market enough to affect the price.

What is marginal cost?

The additional cost of producing one more unit of a product.

How do firms experiment to find the profit-maximizing level of output?

Firms raise or lower the quantity they produce a little, and see how their profits are affected.

What should a firm do if marginal revenue is greater than marginal cost (MR > MC)?

The firm can increase profit by selling an additional unit of the product, so the firm should increase quantity produced.

What should a firm do if marginal revenue is less than marginal cost (MR < MC)?

The firm can increase profit by selling one fewer unit of the product, so the firm should decrease quantity produced.

What should a firm do if marginal revenue is equal to marginal cost (MR = MC)?

The firm cannot increase or decrease profit by changing output, so the firm should not change quantity produced.

At what point should a perfectly competitive firm stop increasing the quantity of product produced?

Marginal revenue equals marginal cost (MR = MC).

How is profit calculated?

Profit margin (or average profit) = Total Revenue - Total Cost / Quantity ; Therefore, profit = (Price - ATC) * Quantity

If Market price > Firm’s ATC of production for a particular quantity produced, then what is true of the firm's profits?

Firm earns an economic profit.

If Market price = Firm’s ATC of production for a particular quantity produced, then what is true of the firm's profits?

Firm earns zero economic profit.

If Market price < Firm’s ATC of production for a particular quantity produced, then what is true of the firm's profits?

Firm earns a loss.

What is the break-even point?

The quantity of output at which the market price is exactly equal to the firm’s ATC.

How do you know if a firm is profitable?

Price > ATC (Firm earns an economic profit); Price = ATC (Firm earns zero economic profit); Price < ATC (Firm earns a loss).

If P < ATC, a firm earns a loss. Should the firm shut down and produce zero quantity of the product?

Shutting down reduces variable costs to zero, but fixed costs remain; If a firm produces zero quantity, it will still earn losses because it must continue paying fixed costs