Firms in Competitive Markets

This set of flashcards covers key concepts relating to firms in competitive markets, including definitions of market structures, revenue calculations, and profit maximization strategies.

What defines a competitive market?

A market with many buyers and sellers trading identical products where each is a price taker.

What are the characteristics of a perfectly competitive market?

Many buyers and sellers, identical goods, and free entry and exit for firms.

How is marginal revenue (MR) defined for all types of firms?

Marginal revenue equals the price of the good.

What is the profit-maximizing level of output for a competitive firm?

The level of output where marginal revenue (MR) equals marginal cost (MC).

What should a competitive firm do if the market price is below its average variable cost (AVC)?

It should shut down temporarily.

What is a sunk cost?

A cost that has already been incurred and cannot be recovered.

How does the long-run supply curve behave in a competitive market?

It is more elastic than the short-run supply curve.

What happens to firms when price (P) is greater than average total cost (ATC)?

Firms make positive profit, leading to new firms entering the market.

What is the effect of an increase in demand on the market price in the short run?

The market price rises above average total cost, giving firms positive economic profit.

What is the condition for a firm to exit the market in the long run?

If total revenue (TR) is less than total cost (TC) or price (P) is less than average total cost (ATC).