Chapter 12: Perfect Competition

Vocabulary and key concepts from Chapter 12 on Perfect Competition, focusing on revenue, profit maximization, and market efficiency.

Perfect competition

A market in which many firms sell identical products to many buyers, there are no restrictions to entry, established firms have no advantages over new ones, and sellers and buyers are well informed about prices.

Minimum efficient scale

The smallest quantity of output at which long-run average cost is minimized; perfect competition arises when this scale is small relative to market demand.

Price taker

A firm that cannot influence the price of a good or service and must "take" the equilibrium market price.

Economic profit

The difference between total revenue and total cost. It is calculated as $ext{Total Revenue} - ext{Total Cost}$.

Total cost

The opportunity cost of production, which includes normal profit.

Total revenue

The price, $P$, multiplied by the quantity sold, $Q$, or $P imes Q$.

Marginal revenue

The change in total revenue that results from a one-unit increase in the quantity sold.

Profit-maximizing output

The output level at which marginal revenue ($MR$) equals marginal cost ($MC$).

Economic loss

The amount by which total cost exceeds total revenue; it is the sum of total fixed cost ($TFC$) plus total variable cost ($TVC$) minus total revenue ($TR$).

Shutdown point

The price and quantity at which a firm is indifferent between producing the profit-maximizing quantity and shutting down; it occurs at minimum $AVC$.

Firm's supply curve

A curve showing how a firm's profit-maximizing output varies with market price; it follows the marginal cost curve at prices above the shutdown point and is zero at prices below it.

Short-run market supply curve

A curve showing the quantity supplied by all firms in the market at each price when each firm’s plant and the number of firms remain the same.

Long-run equilibrium

A market state where firms break even (make zero economic profit) because firms have had enough time to enter or exit the industry.

Efficiency (Resources)

The situation where no one can be made better off without making someone else worse off; this arises when marginal social benefit ($MSB$) equals marginal social cost ($MSC$).

Consumer surplus

The measure of the gain from trade for consumers.

Producer surplus

The measure of the gain from trade for producers.

Total surplus

The sum of consumer surplus and producer surplus, which is maximized at market equilibrium.