3.5: Perfect Competition

What are the four market structures?

Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly

What type of products are sold in perfect competition?

Identical products (perfect substitutes).

How do firms in perfect competition behave regarding price?

Firms are 'Price Takers' and have no control over price.

What is a characteristic of monopolies?

One large firm that is the market with high barriers to entry.

What is one characteristic of oligopolies?

A few large producers with control over price.

How are products in an oligopoly characterized?

They may be identical or differentiated products.

What is a key feature of monopolistic competition?

A relatively large number of sellers with differentiated products.

How do firms in monopolistic competition compete?

They engage in a lot of non-price competition, such as advertising.

What happens when the market demand falls in perfect competition?

Firms will make an economic loss if the price decreases.

What is the profit-maximizing rule for firms?

Firms produce where marginal revenue equals marginal cost (MR=MC).

Under what condition should a firm shut down?

A firm should shut down if the price falls below average variable cost (AVC).

What happens to a firm’s quantity produced if their fixed costs increase?

The firm's quantity produced stays the same because marginal cost does not change.

What does a per-unit tax affect in production costs and quantity produced?

It affects variable costs, so marginal cost (MC), average variable cost (AVC), and average total cost (ATC) shift. Quantity produced will change.

How does a lump-sum tax influence production and quantity produced?

It only affects fixed costs, meaning ATC & AFC change while marginal cost (MC) remains unchanged. Quantity produced does not change.

When analyzing a perfectly competitive firm, which curve represents the short-run supply curve?

The firm's marginal cost curve above the average variable cost.

What is the result of a change in variable costs?

It changes average total cost (ATC), average variable cost (AVC), and marginal cost (MC).

What is the result of a change in fixed costs?

It changes average total cost (ATC) and average fixed cost (AFC), but not marginal cost (MC).