Microeconomics: Chapter 10 - Pure Competition

Flashcards covering key vocabulary and concepts from Chapter 10 of Microeconomics focusing on Pure Competition.

Pure Competition

A market structure characterized by a very large number of sellers producing standardized products with no control over price.

Maximum Economic Profit

The highest profit level realized by a firm, occurring at the output level where total revenue exceeds total costs by the greatest amount.

Marginal Cost (MC)

The additional cost incurred by producing one more unit of a good or service.

Average Revenue (AR)

Total revenue divided by the quantity of goods sold; for price takers, this equals the market price.

Break-even Point

The level of production at which total revenue equals total costs, resulting in neither profit nor loss.

Total Revenue (TR)

The total income generated from sales of a good or service, calculated as price multiplied by quantity sold.

Profit Maximization

The process by which a firm determines the price and output level that leads to the greatest profit.

Total Cost (TC)

The total expenses incurred in producing goods or services, including both fixed and variable costs.

Long Run Equilibrium

A situation in which a firm's entry or exit from a market results in zero economic profit, with price equaling minimum average total cost.

Short-run Supply Curve

A curve that indicates the quantity of goods a firm is willing to supply at various prices, as long as price exceeds minimum average variable cost.

Creative Destruction

The process through which innovation leads to the creation of new products and methods that may displace old ones.

Characteristics of Pure Competition

Key characteristics include: 1. Many sellers and buyers; 2. Homogeneous products; 3. No barriers to entry or exit.

Determining Price in Pure Competition

Firms set prices based on market forces; they are price takers and adjust output to maximize profit.

Calculate Maximum Economic Profit

Given total revenue of $800 and total costs of $600, the maximum economic profit is $200.

Break-even Point Definition

The break-even point is where total revenue equals total cost, indicating zero profit.

Profit Maximization in Pure Competition

Firms maximize profit by producing at the point where marginal cost equals marginal revenue.

Marginal Cost Significance

Marginal cost helps firms decide optimal production levels and pricing under pure competition.

Average Revenue and Price Relationship

In pure competition, average revenue equals the market price for price-taking firms.

Long-run Equilibrium Concept

Long-run equilibrium occurs when firms earn zero economic profit, maintaining market stability.

Short-run Supply Curve Illustration

The short-run supply curve shows the quantity supplied at various prices above variable costs.

Creative Destruction Impact

Creative destruction reshapes markets by promoting innovation that replaces older products or services.

Factors Influencing Market Entry

Barriers such as high startup costs, regulatory requirements, and access to distribution channels affect market entry.

Long-run Adjustments and Zero Economic Profit

Long-run adjustments in supply and demand lead to zero economic profit as new firms enter or exit the market.

Consumer Surplus in Pure Competition

Consumer surplus represents the difference between what consumers are willing to pay and what they actually pay.

Short-run Economic Profits and Market Prices

Short-run economic profits attract new firms, increasing supply and driving down market prices.

Calculate Average Revenue

Given total revenue of $1,200 and quantity sold of 300 units, average revenue is $4 per unit.

Marginal Cost Curve in Supply Decisions

The marginal cost curve informs supply decisions by indicating the cost of producing additional units.

Technological Innovation Impact

Technological advancements can lower costs, increase efficiency, and shift the supply curve in pure competition.

Product Differentiation in Pure Competition

Typically, product differentiation is minimal in pure competition, as products are standardized.

External Economic Factors Effect

Economic downturns can reduce demand and profitability for firms operating in competitive markets.

Price Elasticity of Demand and Revenue Relationship

Price elasticity of demand affects total revenue; for elastic demand, price decreases lead to revenue increases.