Microeconomics- Chapter 11

What is perfect competition?

A: A market structure with many firms selling identical products to many buyers, no entry barriers, equal access to information, and no firm having an advantage.

Q: What are key features of perfect competition?

A:

• Many buyers and sellers

• Identical (homogeneous) products

• Free entry and exit

• Perfect information

• No control over price (price takers)

Give examples of industries close to perfect competition.

A: Farming, fishing, lawn services, plumbing, retail groceries, and laundry services.

When does perfect competition arise?

A: When the minimum efficient scale (MES) of each firm is small relative to market demand, allowing many firms to exist.

Why are firms in perfect competition price takers?

A: Because their output is too small to affect the market price, and all products are identical.

What is total revenue (TR)?

A: TR = Price (P) × Quantity (Q)

What is marginal revenue (MR)?

A: The change in total revenue from selling one more unit. In perfect competition, MR = P.

What does the firm’s demand curve look like in perfect competition?

A: Perfectly elastic (horizontal line at the market price).

What is a firm’s goal in perfect competition?

A: To maximize economic profit = Total Revenue − Total Cost (including opportunity cost).

What are a firm’s three key decisions?

A:

1. How to produce at minimum cost

2. What quantity to produce

3. Whether to enter or exit the market

When is economic profit maximized?

A: When MR = MC (marginal revenue equals marginal cost).

What happens if MR > MC?

A: Increase output to raise profit.

What happens if MR < MC?

A: Decrease output to raise profit.

What is the shutdown point?

A: The price where P = minimum AVC. The firm is indifferent between producing and shutting down.

When does a firm shut down temporarily?

A: When P < AVC, because it can’t cover variable costs.

When does a firm produce despite losses?

A: When AVC < P < ATC, it minimizes loss by producing.

What does a firm’s short-run supply curve correspond to?

A: The portion of its MC curve above the minimum AVC.

How is market price determined in perfect competition?

A: By the intersection of market demand and supply.

What is short-run equilibrium?

A: The situation when market supply equals market demand and each firm produces where P = MC.

What are the three possible short-run outcomes for firms?

A:

• P > ATC: Economic profit

• P = ATC: Break-even (normal profit)

• P < ATC: Economic loss

What happens to market price if demand increases in the short run?

A: Price rises, output increases, and firms earn economic profits.

What happens if demand decreases in the short run?

A: Price falls, output decreases, and firms incur losses; some may shut down.

What happens when firms earn an economic profit?

A: New firms enter, supply increases, price falls, and profit is eliminated.

What happens when firms incur losses?

A: Firms exit, supply decreases, price rises, and losses are eliminated.

What is long-run equilibrium in perfect competition?

A: When firms make zero economic profit (P = minimum ATC), and there’s no incentive for entry or exit.

What happens to market output and individual firm output in the long run?

A: Market output increases (more firms), but each firm produces less at the new equilibrium.

How does new technology affect firms?

A: Lowers production costs, giving early adopters temporary economic profit.

What happens as more firms adopt new technology?

A: Market supply increases, price falls, old-technology firms exit, and profits return to zero.

In long-run equilibrium after technological change, what remains?

A: Only firms with new technology, earning zero economic profit at the lowest ATC.

When is resource use efficient?

A: When marginal social benefit (MSB) = marginal social cost (MSC).

What does the market demand curve represent?

A: The marginal social benefit of the good.

What does the market supply curve represent?

A: The marginal social cost of production.

What is consumer surplus?

A: The area below the demand curve and above price — value consumers gain.

What is producer surplus?

A: The area above the supply curve and below price — value producers gain.

Why is perfect competition efficient in the long run?

A: Firms produce at the lowest possible cost (minimum ATC) and total surplus is maximized.

Total Revenue (TR) = ?

A: P × Q

Economic Profit (EP) = ?

A: TR − TC (including opportunity cost)

Economic Loss (if operating) = ?

A: TFC + TVC − TR

Shutdown condition?

A: Produce if P ≥ AVC; shut down if P < AVC.

Profit-maximizing rule?

A: MR = MC

What caused Teck Resources to shut down its coal mines in 2015?

A: Market price ($106/tonne) fell below AVC, leading to a temporary shutdown to minimize loss.

How did the cellphone market illustrate entry and exit?

A: Early profits by Motorola attracted new entrants (Nokia, Apple), increasing competition, reducing prices, and eliminating long-run economic profits.

What happens when demand for a product decreases permanently (e.g., retail stores)?

A: Firms exit, supply decreases, price stabilizes, and remaining firms return to zero economic profit.