Firms in Perfectly Competitive Markets

These flashcards cover essential concepts related to firms operating in perfectly competitive markets.

What is a perfectly competitive market?

A market structure with many buyers and sellers, all firms sell identical products, and there are no barriers to new firms entering the market.

What does it mean for a firm to be a price taker?

A firm that cannot influence the market price and must accept the prevailing market price.

Where does a perfectly competitive firm maximize profit?

A perfectly competitive firm maximizes profit by producing at the quantity where marginal revenue equals marginal cost (MR = MC).

How does a perfectly competitive firm decide whether to produce or shut down in the short run?

If the firm can cover its variable costs (P ≥ AVC), it should continue to produce; if not, it should temporarily shut down.

What happens in the long run if firms are making economic profits in a perfectly competitive market?

New firms will enter the market, increasing supply and driving prices down to the break-even level.

How do fixed costs influence a firm's shutdown decision?

Fixed costs should be ignored in the shutdown decision since they are sunk costs that cannot be recovered.

What occurs when the number of firms in a market increases?

Increased supply will lead to a lower market price until no economic profits are made, leading to firms breaking even.

What does it mean for a firm to break even?

A situation in which total revenue equals total costs, resulting in zero economic profit.

Define allocative efficiency.

A state where production is aligned with consumer preferences, ensuring that the last unit produced provides a marginal benefit equal to marginal cost.

Define productive efficiency.

A condition where goods or services are produced at the lowest possible cost.