Grade 11 Economics: Chapter 2- Lesson 2.2.3&2.2.4

How can a firm change its product supply in the short run?

By changing only its variable factors of production, while its fixed factors remain completely unchanged.

What does a standard supply curve show?

It indicates the relationship between price and quantity supplied, showing the specific quantities a seller is willing to sell at various price levels.

Up to what point will a firm continue to supply commodities in the short run if it is experiencing losses?

As long as the market price is greater than or equal to its Average Variable Cost

(P>= AVC).

What constitutes the actual short-run supply curve of a perfectly competitive firm?

It is that specific portion of its Marginal Cost (MC) curve that lies above the Average Variable Cost (AVC) curve.

Why will a perfectly competitive firm supply zero units if the market price drops below its minimum Average Variable Cost (AVC)?

Because at any price below minimum AVC, the firm fails to even cover its operating (variable) costs, making it more rational to shut down and only bear its fixed costs.

In a perfectly competitive industry, how is the short-run market supply curve derived?

By adding together (horizontal summation) the individual short-run supply curves of all the single firms operating in that industry.

What radical change happens to a firm's inputs in the long run compared to the short run?

All inputs become entirely variable; there are no longer any fixed costs or fixed factors of production.

What happens to the barriers of entry and exit for firms in the long run under perfect competition?

There are no barriers; existing firms are completely free to leave the industry if they make losses, and new firms are completely free to enter if they see profits.

If existing firms are making high economic profits in the short run, what will happen in the long run?

New firms will be attracted and enter the market. This increases total supply, which drives the market price down until profits are entirely wiped out.

If existing firms are suffering economic losses in the short run, what will happen in the long run?

Some existing firms will exit the market. This decreases total supply, which pushes the market price upward until the remaining firms stop losing money.

What type of economic profit do all perfectly competitive firms earn when the market reaches long-run equilibrium?

They earn zero economic profit (also called normal profit), where price perfectly equals the minimum Average Total Cost (P = \text{minimum } ATC).

What is the triple mathematical equality that satisfies a competitive firm's long-run equilibrium?

$$\text{Price } (P) = \text{Marginal Cost } (MC) = \text{Minimum Average Total Cost } (ATC)$$

At what specific point along the Average Total Cost (ATC) curve does a firm operate when it is in long-run competitive equilibrium?

At its absolute minimum point, meaning the firm is producing at maximum productive efficiency.

Why is a pure monopoly market considered the exact opposite end of the spectrum from perfect competition?

A monopoly firm has no rivals and is the sole seller in its industry.

• There are no close substitutes for its product.

• Entry by potential competitive rivals is prohibitively difficult (high barriers).