Firms in Perfectly Competitive Markets Vocabulary

Flashcards on Firms in Perfectly Competitive Markets

Perfectly competitive market

A market that meets the conditions of many buyers and sellers, all firms selling identical products and no barriers to new firms entering the market.

Price taker

A buyer or seller that is unable to affect the market price—i.e., takes the market price as given

Average revenue (AR)

Revenue per unit of output. In perfect competition, AR = P.

Marginal revenue (MR)

Additional revenue received from selling one more unit of output

Opportunity cost

The next best alternative given up when choosing to do a certain activity

Accounting cost

An explicit cost that involves spending money

Economic cost

Explicit costs + implicit opportunity costs foregone.

Accounting profit

TR - accounting cost = TR - explicit cost

Economic profit

TR - economic cost = TR-(explicit cost + implicit cost) = TR - explicit cost - implicit cost = (TR- explicit cost) - implicit cost = accounting profit - implicit cost

Short-Run Production Decision

If TR ≥ VC, then stay open in the short run. If TR < VC, then shut down in the short run.

Profit maximizing output (Q*)

The level of output that occurs where MC and MR intersect (the second time), as long as the firm chooses to stay open and produce output and not temporarily shut down.

Breakeven point

Occurs at the quantity of output where P = ATC, which means the firm breaks even (i.e., TC = TR)

Shutdown point

The lowest point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

Sunk cost

A cost that has already been paid and that cannot be recovered

Long-run competitive equilibrium

The situation in which the entry and exit of firms have resulted in the typical firm just breaking even (i.e., remaining firms are earning zero economic profit)