L14: Perfect Competition

These flashcards cover key concepts of perfect competition in microeconomics, focusing on market structure, profit maximization rules, and equilibrium.

What does market structure refer to?

Market structure refers to the characteristics of a market that may affect trades, such as the number of sellers, barriers to entry, product differentiation, and the number of buyers.

What are the two rules for profit maximization in perfect competition?

1. Marginal output rule: Produce where marginal revenue (MR) equals marginal cost (MC). 2. Shutdown rule: Shut down if price (p) is less than average cost (AC) or average variable cost (AVC).

What does 'perfect competition' mean in economics?

'Perfect competition' refers to an ideal market structure characterized by many buyers and sellers, where no single buyer or seller can affect the market price.

What is the long-run equilibrium condition in perfectly competitive markets?

In the long-run equilibrium, sellers will make normal profit (zero economic profit), and no seller will enter or leave the market.

What is meant by 'sellers are price takers'?

Sellers are price takers when they believe their output choice will not affect the market price and can sell as much as they want at that price.

What ensures that there are many sellers in a perfectly competitive market?

The assumption of free entry into the market ensures that there will be many sellers.

Explain the impact of barriers to entry in perfect competition.

Low barriers to entry allow new firms to enter the market freely, promoting competition.

What are the characteristics of goods sold in a perfectly competitive market?

Goods sold are considered identical or homogeneous, meaning buyers view all products as the same and will choose the cheapest option.

How is market price determined in a perfectly competitive market?

Market price is determined by the intersection of market supply and demand.

What happens to sellers' profits in the short-run vs long-run in perfect competition?

In the short-run, sellers may make supernormal profits; in the long-run, economic profits tend to zero as firms enter or exit the market, leading to normal profits.

What are price takers?

Price takers are firms or individuals in a market who must accept the prevailing market price for a product, as they cannot influence that price due to their small size or market share.

What is the shutdown rule?

The shutdown rule states that a firm should continue operating in the short run as long as the revenue it receives from selling its products covers its variable costs.

What is equilibrium price?

Equilibrium price is the price at which the quantity of a product demanded by consumers equals the quantity supplied by producers.

What are fixed costs?

Fixed costs are expenses that do not change with the level of production or sales, such as rent and salaries.

What are variable costs?

Variable costs are expenses that vary directly with the level of production, such as raw materials and hourly labor.

What is the marginal output rule?

The marginal output rule states that a firm should continue to increase production as long as the marginal cost of producing an additional unit is less than the marginal revenue gained from that unit.