Firm Behavior and Efficiency in Pure Competition

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22 Terms

1

Profit Maximization

Firms aim to maximize profits and minimize losses.

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2

Free Entry and Exit

No restrictions for firms entering or leaving the market.

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3

Long-Run Equilibrium

Condition where MR = MC and price equals minimum ATC.

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4

Economic Profit

Zero economic profit occurs in long-run equilibrium.

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5

Market Supply Increase

More firms entering raises overall market supply.

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6

Long-Run Supply Curve

Price remains constant; output adjusts with demand.

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7

Constant-Cost Industry

Entry/exit does not affect market prices.

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8

Increasing-Cost Industry

Expansion raises input prices, creating upward supply curve.

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9

Decreasing-Cost Industry

Expansion lowers costs, leading to downward supply curve.

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10

Productive Efficiency

Goods produced at the lowest possible cost.

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11

Allocative Efficiency

Price equals marginal cost, maximizing resource allocation.

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12

Consumer Surplus

Difference between maximum price consumers pay and actual price.

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13

Producer Surplus

Difference between minimum price producers accept and received price.

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14

Normal Profit

In long run, firms earn zero economic profit.

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15

Supernormal Profit

Short-run profit occurs when MR exceeds ATC.

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16

Market Adjustments

Entry/exit of firms adjusts prices and quantities.

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17

Homogeneous Products

Identical products offered by all firms in market.

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18

Price Takers

Firms accept market price; cannot influence it.

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19

Perfect Information

Complete knowledge of prices and market conditions exists.

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20

Optimal Resource Allocation

Resources allocated efficiently, maximizing total economic surplus.

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21

Short-Run Losses

Firms exit market when MR is below ATC.

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22

Total Surplus Maximization

Perfect competition leads to no deadweight loss.

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