Unit 8: Perfect Competition - Microeconomics

Market Structure

Important features of a market, such as the number of firms, product uniformity across firms, firm’s ease of entry and exit, and forms of competition. 

Perfect Competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run. 

Commodity

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold. 

Price Taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm. 

Marginal Revenue

The change in total revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price. 

Golden Rule of Profit Maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.

Average Revenue

Total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price.

Short-Run Firm Supply Curve

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve. 

Short-Run Industry Supply Curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal out sum of each firm's short-run supply curve. 

Long-Run Industry Supply Curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand. 

Constant-Cost Industry

An industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal. 

Increasing-Cost Industry

An industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward. 

Producer Efficiency

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run.

Allocative Efficiency

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost. 

Producer Surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.

Social Welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.