Firms in Perfectly Competitive Markets

These flashcards cover key concepts related to firms in perfectly competitive markets, including market characteristics, profit maximization, and the impact of firm entry and exit.

What characterizes a perfectly competitive market?

Many buyers and sellers, identical products, and no barriers to entry or exit.

Why does a perfect competitor face a horizontal demand curve?

Because they are price takers and cannot influence the market price.

How do firms maximize profit in a perfectly competitive market?

By producing the output level where marginal revenue equals marginal cost (MR=MC).

What happens to perfectly competitive firms in the long run regarding economic profit?

They earn zero economic profit due to entry and exit of firms.

What are the two short-run decisions a firm can make when suffering losses?

Continue production if price is greater than average variable cost (P>AVC), or shut down temporarily if price is less than average variable cost (P<AVC).

What is the shutdown point in the context of perfect competition?

The minimum price at which a firm covers its average variable costs (P=min AVC).

What leads to the exit of firms in a perfectly competitive market?

Economic losses prompt some firms to leave the industry.

How does entry affect economic profits in a perfectly competitive market?

Economic profits attract new entrants, increasing supply, and driving down prices.

What does average revenue (AR) equal in a perfectly competitive market?

AR equals price, and is the same as marginal revenue (MR).

What is the relationship between total revenue (TR) and total cost (TC) at the profit-maximizing output?

Profit is maximized where TR - TC is greatest.

What occurs when a firm makes economic losses?

They will experience a decrease in demand for their product, leading to potential exit from the market.