Lecture Notes Chapter 10: Pure Competition in the Short Run

What are the four basic market models?

Pure competition, pure monopoly, monopolistic competition, and oligopoly.

Characteristics of pure competition include: __________.

A large number of firms, homogeneous or standardized product, “price taker”, and easy entry or exit.

Average revenue in pure competition is equal to __________.

The price per unit for each firm.

Total revenue is calculated by __________.

Multiplying the price by the quantity sold.

Marginal revenue is __________.

The change in total revenue and will also equal the unit price in conditions of pure competition.

What approach do purely competitive firms use to maximize profits in the short run?

Both total-revenue—total-cost and marginal-revenue—marginal-cost approaches.

Define pure monopoly.

A market structure with one firm that is the sole seller of a product or service with no close substitutes. Entry is blocked for other firms.

Monopolistic competition is characterized by __________.

Differentiated products among sellers and fewer firms.

An oligopoly consists of __________.

Only a few firms that are interdependent in pricing and output decisions.

Pure competition is considered rare but important because __________.

It provides a standard for evaluating the efficiency of real-world markets.

In a purely competitive market, sellers are considered __________.

Price takers.

What does freedom of entry and exit mean in pure competition?

No significant obstacles prevent firms from entering or leaving the industry.

Demand viewed by a purely competitive seller appears __________.

Perfectly elastic.

The marginal cost curve for a firm in pure competition is the same as __________.

The firm's supply curve.

To maximize profits, a firm in the short run must determine: __________.

Whether to produce, how much to produce, and the level of profit or loss.

The formula for calculating profit is __________.

Total revenue minus total cost.

A firm should shut down in the short run if __________.

Its loss exceeds its fixed costs.

What does the MR = MC rule indicate for profit maximization?

Produce output where marginal revenue equals marginal cost.

How does a decrease in demand affect a firm in the short run?

It either will adjust output or may consider shutting down.

In what situation would a firm experience a minimum loss?

When it produces at a level where marginal revenue exceeds average variable costs.

What is the impact of higher fixed costs on a firm's decision to shut down?

Fixed costs must be covered, hence the firm should continue production if possible.

Equilibrium price in a competitive market is determined by __________.

The intersection of total supply and total demand.

Economic profits occur when __________.

Total revenues exceed total costs.

What is the minimum loss a firm incurs if it shuts down?

The value of its fixed costs.

Why is the demand curve for a firm in pure competition horizontal?

Because the firm can sell as much as it wants at the market price without affecting it.

Define the total-cost approach for firms in pure competition.

Comparing total revenue to total cost to determine profitability.

What does a firm do if the price falls below its average variable cost?

The firm will shut down production.

Under what condition would a firm increase production?

When marginal revenue exceeds marginal costs.

When should a competitive firm consider producing in the short run?

When it can cover its average variable costs.

What does it mean for a firm to experience diminishing returns?

Adding more of a variable input results in smaller increases in output.

In the short-run equilibrium, total costs must equal __________.

Total revenue if the firm is breaking even.

Why might a motel remain open despite decreasing demand?

If the price is above minimum average variable costs.

Identify one reason why firms might not reopen after shutting down.

Economic conditions might not improve sufficiently.

What role do fixed costs play in a firm's decision to continue production?

Firms hope to generate enough revenue to cover fixed costs.

The formula for total revenue is __________.

Price multiplied by quantity sold.

What is a 'mothballing' strategy?

Temporarily shutting down operations while maintaining ready-to-reopen status.

How do competitive firms react to price changes in the market?

They adjust their output to maximize profits or minimize losses.

What is the significance of the break-even point for a firm?

It's the level of output where total revenue equals total cost.