AP micro unit 3

What is perfect competition?

A market structure characterized by a large number of small firms, identical products, and no barriers to entry or exit.

Where is the profit maximizing quantity found?

The profit maximizing quantity is found where marginal cost equals marginal revenue.

Characteristics of perfectly competitive markets

1. Many sellers 2. Homogeneous products 3. Free entry and exit 4. Perfect information 5. Price takers

What is the ability to affect price in perfect competition?

Firms in perfect competition are price takers and cannot influence the market price.

Are perfectly competitive markets allocatively efficient?

Yes, they are allocatively efficient because they produce at a level where price equals marginal cost.

Are perfectly competitive markets productively efficient?

Yes, they are productively efficient as firms produce at the lowest point of their average total cost curve.

What happens in the long run when firms earn economic profits?

New firms will enter the market, increasing supply and driving down prices until profits are eliminated.

What happens in the long run when firms incur economic losses?

Some firms will exit the market, decreasing supply and raising prices until losses are eliminated.

When will a firm temporarily shut down?

A firm will temporarily shut down if the price falls below average variable costs.

Where is the firm's supply curve in perfect competition?

The firm's supply curve is the portion of the marginal cost curve that lies above the average variable cost curve.

Describe the market's long run supply curve.

The long run supply curve is typically horizontal in perfect competition, indicating constant costs.

What are fixed costs?

Costs that do not change with the level of output, such as rent and salaries.

What are variable costs?

Costs that vary directly with the level of output, such as materials and labor.

What are total costs?

The sum of fixed costs and variable costs at a given level of output.

What is marginal cost?

The additional cost incurred from producing one more unit of output.

What is average variable cost?

The variable cost per unit of output, calculated by dividing total variable costs by the quantity produced.

What is average total cost?

The total cost per unit of output, calculated by dividing total costs by the quantity produced.

What is average fixed cost?

The fixed cost per unit of output, calculated by dividing total fixed costs by the quantity produced.

What is total revenue?

The total income generated from selling goods or services, calculated as price times quantity sold.

What is the formula for accounting profit?

Accounting profit is calculated as total revenue minus explicit costs.

What is the formula for economic profit?

Economic profit is calculated as total revenue minus the sum of explicit and implicit costs.

What causes increasing returns?

Increasing returns occur when the addition of inputs leads to a more than proportional increase in output.

What is marginal product?

The additional output generated by adding one more unit of labor or input.