1/23
Flashcards about Firms in Perfectly Competitive Markets
Name | Mastery | Learn | Test | Matching | Spaced |
---|
No study sessions yet.
Perfectly Competitive Market
A market with many buyers and sellers, homogeneous goods, and free entry and exit for firms.
Perfect Competition Characteristic
The actions of any single buyer or seller in the market have a negligible impact on the market price
Average Revenue (AR)
Total revenue divided by the quantity sold, indicating how much revenue a firm receives for a typical unit sold. AR = TR/Q = PQ/Q = P in perfectly competitive markets
Marginal Revenue (MR)
The change in total revenue from an additional unit sold. It's the slope of the total revenue function. MR = change in TR/change in Q
Marginal Revenue in Perfect Competition
For a perfectly competitive firm, marginal revenue equals the price of the good (MR = P).
Profit Maximization Rule
A firm maximizes profit by producing the quantity of output where marginal revenue equals marginal cost (MR = MC).
Production in Perfect Competition
In perfect competition, a firm will produce where price equals marginal cost (P = MC).
Firm's Short-Run Supply Curve
The portion of the marginal cost (MC) curve that lies above the minimum average variable cost (AVC).
Short-Run Shutdown Decision
A firm will shut down in the short run if the price is less than the average variable cost (P < AVC).
Sunk Costs
Costs that have already been committed and cannot be recovered. They are irrelevant when deciding whether to shut down.
Demand Curve in Perfect Competition
The firm's demand curve is perfectly elastic
Perfect Competition Demand Curve
The individual firm's demand curve in a perfectly competitive market is precisely the price level! P = AR = MR = D
Positive Economic Profit
When price is greater than average total cost (P > ATC).
Negative Economic Profit (Loss)
When price is less than average total cost (P < ATC).
Zero Economic Profit (Normal Profit)
When price equals average total cost (P = ATC).
Breakeven Point
Occurs where price equals the minimum average total cost (P = min ATC).
Long-Run Exit Decision
A firm will exit an industry if price is less than the minimum average total cost (P < min ATC).
Long-Run Entry Decision
A firm will enter an industry if price is greater than the minimum average total cost (P > min ATC).
Long-Run Equilibrium
When there is no entry into or exit out of the industry.
Long-Run Equilibrium Conditions
Firms maximize SR profits such that P = SR MC, Profit = 0 so there’s no entry or exit, so P = min SR ATC, LRAC is at a minimum, so P = min LRAC, Firms produce at efficient scale.
Market Supply
Market supply equals the sum of the quantities supplied by the individual firms in the market.
Total Revenue
The total income a firm receives from selling its goods or services, calculated by multiplying the price per unit by the quantity sold. TR = P x Q
Profit (Perfectly Competitive Market)
The difference between total revenue and total costs. In a perfectly competitive market, profits are maximized when marginal cost equals marginal revenue, leading to zero economic profit in the long run.