Characteristics of Perfect Competition

Flashcards covering key concepts related to perfect competition, including characteristics, behaviors, and economic principles.

Perfect Competition

A market structure characterized by many buyers and sellers, homogeneous products, price-taking behavior, perfect information, and free entry and exit.

Many Buyers and Sellers

In a perfectly competitive market, there are numerous buyers and sellers such that no single entity can influence the market price.

Homogeneous Product

Goods that are identical in consumer perception, meaning consumers do not prefer one seller over another.

Price-Taking Behavior

Firms accept the market equilibrium price as given and cannot influence it by their production decisions.

Perfect Information

A condition in which all buyers and sellers have complete knowledge of prices and product quality, removing any information advantage.

Free Entry and Exit

Firms can enter the market when profits are present and exit when losses occur, with no major barriers.

Market Demand

The total quantity demanded across all firms in a market, typically represented as a downward-sloping curve.

Individual Firm Demand

Demand faced by a single firm that is perfectly elastic at the market price due to identical products.

Total Revenue (TR)

The total income a firm receives from selling its goods, calculated as Price (P) multiplied by Quantity (Q).

Marginal Revenue (MR)

The additional revenue generated from selling one more unit of a good, which equals the price in perfect competition.

Total Cost (TC)

The total expense incurred in production, including both explicit and implicit costs.

Economic Profit

The difference between total revenue and total cost, indicating profitability beyond normal profit.

Profit-Maximizing Output

The level of production where the difference between total revenue and total cost is the largest.

Marginal Cost (MC)

The increase in total cost that arises from producing one additional unit of a product.

Break-Even Price

The price at which total revenue equals total cost, resulting in zero economic profit.

Shutdown Price

The price level at which a firm will cease production because it cannot cover its variable costs.

Operating with an Economic Profit

A scenario where the price of the product is greater than the average total cost at profit-maximizing output.

Operating with an Economic Loss

A situation where total revenue is less than total cost but more than variable costs, prompting firms to continue production.

Shut Down Condition

A scenario where the price is below average variable cost at all positive quantities, leading firms to stop production.

Industry Short-Run Supply Curve

The horizontal sum of firms' short-run supply curves in a market.

Long-Run Entry and Exit

The process by which firms enter or exit a market in response to economic profits or losses.

Long-Run Equilibrium

A state where price equals marginal cost and average total cost, resulting in zero economic profit in the long run.

Allocative Efficiency

A condition where the price of a good reflects its marginal social cost, leading to optimal resource allocation.

Productive Efficiency

A situation where goods are produced at the lowest possible average cost.

Total Surplus

The sum of consumer surplus and producer surplus, maximized under perfect competition.