Intro to MicroEcon Unit 8: Perfect Competition

Market Structure

Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition.

Perfect Competition

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

Commodity

Standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.

Price Taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.

Marginal Revenue

The change in total revenue from selling an additional unit, in perfect competition, also is the market price.

Golden Rule of Profit Maximization

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.

Average Revenue

Total revenue divided by output, or ? = TR/q; in all market structures, average revenue equals the market price.

Short-Run Firm Supply Curve

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

Short-Run Industry Supply Curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve.

Long-Run Industry Supply Curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand.

Constant-Cost Industry

An industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal.

Increasing-Cost Industry

An industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward.

Producer Efficiency

The condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run.

Allocative Efficiency

The condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost.

Producer Surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs.

Social Welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.