Perfect Competition: Key Concepts and Graphs for Economics

What are the three characteristics of a perfectly competitive market?

Many buyers and sellers, identical products, free entry and exit.

What does it mean for a firm to be a price taker?

A firm cannot influence market price; the price is given by the market.

What is the relationship between Price (P), Average Revenue (AR), and Marginal Revenue (MR) in a competitive firm?

P = AR = MR.

How is Total Revenue (TR) calculated?

TR = P × Q.

What is the Profit Maximization Rule for a firm?

A firm maximizes profit where MR = MC.

What should a firm do if MR > MC?

Increase output.

What should a firm do if MR < MC?

Decrease output.

What does it indicate if Price (P) is greater than Average Total Cost (ATC)?

The firm is making a profit.

What does it indicate if Price (P) is less than Average Total Cost (ATC)?

The firm is incurring a loss.

What is the rule for shutting down in the short run?

Shut down if P < AVC.

What is the difference between shutting down and exiting the market?

Shutting down is temporary; exiting is permanent.

What is the condition for a competitive firm's short-run supply curve?

MC is above AVC.

What is the condition for a competitive firm's long-run supply curve?

MC is above ATC.

What happens when firms earn profit in the long run?

New firms enter the market, shifting supply right and lowering price.

What happens when firms incur losses in the long run?

Firms exit the market, shifting supply left and raising price.

What is the long-run equilibrium condition in a perfectly competitive market?

P = minimum ATC, leading to economic profit = 0.

Under what conditions does the long-run supply curve slope upward?

When firms have different costs or costs change with the number of firms.

How do you calculate profit per unit?

Profit per unit = AR - ATC.

If a firm produces 100 units with AR = $10 and ATC = $8, what is the total profit?

Total profit = (10 - 8) × 100 = $200.

What is the Average Variable Cost (AVC) if ATC = $8 and AFC = $2?

AVC = ATC - AFC = 8 - 2 = $6.

What is the efficient scale of production?

The output level where ATC is lowest.

What is the summary of the profit maximization conditions in perfect competition?

Price taker, MR = MC → P = MC, shut down if P < AVC, exit if P < ATC.