ECO 202 Chapter 10 - Pure Competition Review

These flashcards cover key vocabulary and concepts related to pure competition from Chapter 10 of ECO 202.

Perfectly Competitive Industry

An industry characterized by many firms producing a homogeneous product, where no single firm can influence the market price.

Demand Curve for Individual Firm

In a perfectly competitive industry, the demand curve faced by an individual firm is a horizontal line at the market price.

Total Revenue (TR)

The total income received from sales of a good or service, calculated as price times quantity sold.

Marginal Revenue (MR)

The additional revenue that will be generated by increasing product sales by one more unit.

Profit Maximization Condition

A purely competitive firm maximizes profit by producing at the output level where marginal revenue equals marginal cost (MR = MC).

Average Variable Cost (AVC)

The variable cost per unit of output, which can influence a firm's decision to continue production.

Shut Down Condition

A firm should shut down production if the market price is below the minimum average variable cost (P < minimum AVC).

Long Run in Pure Competition

A time period long enough for firms to enter or exit an industry, and for existing firms to adjust their capacities.

Economic Profit

The profit that remains after all explicit and implicit costs have been deducted.

Increasing-Cost Industry

An industry in which the long-run supply curve is upward sloping due to rising input costs as industry output increases.

Decreasing-Cost Industry

An industry in which the long-run supply curve is downward sloping, where costs decrease as industry output increases.

Allocative Efficiency

A situation where resources are allocated in a way that maximizes total benefit to society; occurs when price equals marginal cost (P = MC).

Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is

a horizontal line at 2 cents per paper clip

Marginal revenue is the change in total revenue associated with additional units of output.” Explain verbally and graphically, using the data in the table

True. When output (quantity demanded) increases by 1 unit, total revenue increases by $2. This $2 increase is the marginal revenue. Figure: The change in TR is measured by the slope of the TR line, 2 (= $2/1 unit)

A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which

TR exceeds TC by as much as possible.

If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which

b. MR = MC.

A perfectly competitive firm that makes car batteries has total fixed costs of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a and should production.

Answer: d. loss; shut down.

When discussing pure competition, the term long run refers to a period of time long enough to allow

a. firms already in an industry to either expand or contract their capacities. b. new firms to enter or existing firms to leave. c. both a and b.

Suppose that the pen-making industry is perfectly competitive. Also suppose that all current firms and any potential firms that might enter the industry all have identical cost curves, with minimum ATC = $1.25 per pen. If the market equilibrium price of pens is currently $1.50, what would you expect the equilibrium price to be in the long run?

Answer: c, $1.25.

Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry is purely competitive, we would expect the long-run supply curve for mobile phones to be

Answer: b. Downward sloping.