Perfect Competition and the Invisible Hand

Flashcards covering key concepts of perfect competition and market dynamics as discussed in the lecture.

Shutdown Decision

Produce if P > minimum AVC, shut down if P < minimum AVC.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good changes when there is a change in price.

Producer Surplus Calculation

The difference between what producers are willing to accept for a good and what they actually receive.

The Invisible Hand

A concept by Adam Smith suggesting that individual self-interest and competition lead to efficient resource allocation in a market.

Social Surplus

The sum of consumer surplus and producer surplus, maximized by the invisible hand in a free market.

Pareto Efficiency

An allocation is Pareto efficient if no one can become better off without making someone else worse off.

Characteristics of Perfect Competition

Includes many buyers and sellers, homogeneous products, and free entry and exit of firms.

Price Takers

Firms in a perfectly competitive market that must accept the market equilibrium price.