Perfect Competition Review

Flashcards covering key concepts, definitions, and rules related to market structure and perfect competition from the lecture notes.

What is market structure?

The classification of industries based on the power a firm would have to affect the price of the product.

What factors differentiate markets or market structures?

The number of firms in the market, the ease of entry and exit, and the ability of firms to differentiate their products.

What are the primary characteristics or assumptions of perfect competition?

Many sellers and buyers (meaning they are price takers), perfect information/knowledge, freedom of entry into and exit from the industry, and homogenous products.

What is the primary goal of any company?

To maximize its profits.

How are profits calculated?

Total revenues minus the total costs of production (Profits = Total Revenues - Total Costs).

What is the objective of a perfectly competitive firm regarding its output?

To produce the level of output that will maximize profit.

What does it mean for a perfectly competitive firm to be a 'price-taking firm'?

The firm takes the price from the market and cannot influence the price by controlling the quantity it supplies.

How is the price set in a perfectly competitive market?

Price is set by the market forces of demand and supply.

What is the shape of the total revenue curve for a perfectly competitive firm?

An upward-sloping line, because total revenue changes only with changes in the quantity sold at a constant price.

What are the two main approaches to finding profit maximization outputs?

The Totals Approach and the Marginal Approach.

According to the Totals Approach, how does a producer maximize profit?

By finding the largest gap between total revenue and total cost.

What is marginal revenue?

The addition to total revenue from producing and selling one more unit of a good.

In a perfectly competitive market, what is the relationship between marginal revenue (MR) and market price (P)?

LMMarginal revenue is always equal to the market price (MR=P).

What is the profit maximization rule according to the Marginal Approach?

Produce where marginal revenue is equal to marginal cost (MR=MC).

How is profit per unit calculated for a perfectly competitive firm?

Revenue per unit minus cost per unit (Price - Average Total Cost).

How is total profit calculated using price, average cost, and quantity produced?

Total profit = (Price – Average Cost) × quantity produced.

In the short-run for a perfectly competitive firm, when is there a profit, a break-even point, or a loss?

A profit is made when P > minimum of SATC; breaking even when P = minimum of SATC; and a loss occurs when P < minimum of SATC.

When should a loss-making firm continue to operate versus shut down in the short-run, based on variable costs?

A firm should continue to operate if the price (P) is greater than Average Variable Cost (AVC); it should shut down if P is less than or equal to AVC.

What is the shutdown point for a firm?

The point at which the firm is indifferent between operating and shutting down, which occurs at the minimum of Average Variable Cost (AVC).

What constitutes a perfectly competitive firm's short-run supply curve?

The firm’s Short-run Marginal Cost (SMC) curve rising above the minimum point on its Short-run Average Variable Cost (SAVC) curve.

What three conditions must hold for a market to reach a long-run equilibrium in perfect competition?

The quantity of product supplied equals the quantity demanded, each firm maximizes its profit, and each firm earns zero economic profit.

What is the economic profit for a typical firm in long-run equilibrium under perfect competition?

Zero economic profit.

In long-run equilibrium for a perfectly competitive firm, what is the relationship between Price (P), Marginal Revenue (MR), Marginal Cost (MC), and Short-run Average Total Cost (SATC)?

P = MR = MC = SATC.

What is an increasing-cost industry?

An industry in which the average cost of production increases as the total output of the industry increases.

What are two reasons why average cost increases as an increasing-cost industry grows?

Increasing input prices and less productive inputs.

What is the slope of the long-run industry supply curve for an increasing-cost industry?

Positively-sloped (upward sloping).

What is a constant-cost industry?

An industry in which firms continue to buy inputs at the same prices, and the average cost of production stays constant as total output increases.

What is the shape of the long-run supply curve for a constant-cost industry?

Horizontal, at the constant average cost of production.