3.4.2 Perfect Competition

What is a characteristic of perfect competition regarding the number of sellers?

A larger number of sellers

What type of products are sold in a perfectly competitive market?

Homogenous or identical products

What does perfect competition imply about information availability?

Perfect information

What is the condition for entry and exit in a perfectly competitive market?

Free entry and exit

What are firms considered in terms of pricing in perfect competition?

Price takers

What is the long-run economic profit condition in perfect competition?

Zero long-run economic profit

In perfect competition, what is the relationship between Demand (D), Average Revenue (AR), and Marginal Revenue (MR)?

D = AR = MR

Why does AR equal MR in perfect competition?

Because all units are sold at the same price, so marginal revenue stays the same as AR

What does the area EFGH represent in the short-run profit-making scenario?

The size of profit at profit maximization

What happens in the long run when firms make supernormal profits?

More firms enter the market, increasing supply and driving prices down to normal profit levels

What occurs when firms incur losses in the short run?

The firm is making a loss because costs are higher than revenue

What is the outcome when some firms leave the market due to losses?

Lower supply causes AR = MR to shift upwards, returning to normal profits in the long run

What does the term 'normal profit' mean in the context of perfect competition?

A situation where firms earn just enough to cover their costs, with no economic profit

What does the shift of the industry supply curve to the right indicate?

An increase in supply due to new entrants, which lowers the industry price

What does the area EFGH represent in the short-run loss-making scenario?

The size of loss at profit maximization

What is the significance of the point where D = AR = MR?

It indicates the profit-maximizing output level for firms in perfect competition