Ch 7 - Perfect Competition

Monopolistic competition

is an imperfect competition where producers produce opposing goods than each other however are competing against each other.

Allocative Efficiency

when a firm produces the socially optimal output level where P= MC.

The four Market Structures

Vary from perfect competition to imperfectly competitive models of monopolistic competition and oligopoly to monopoly

Monopolistic competition

is an imperfect competition where producers produce opposing goods than each other however are competing against each other

Oligopoly

is a type of competition in which one firm in different sectors will dominate the market

Monopoly

In a monopoly market, the seller faces no competition as they are dominating the market, and have a major market share

Profit-Maximising level of output

Perfectly competitive firms and all other products maximise economic profit by producing where marginal revenue (MR) equals marginal cost (MC) * MR = MC is at this profit maximising level of output

Perfect Competition

Are characterized by large numbers of sellers that complete in national and global markets

Allocative Efficiency

when a firm produces the socially optimal output level where P=MC. Here, it means that the amount being produced is the exact amount which a society needs. More or less production of this good would be inefficient

Productive Efficiency

when a good is being produced, P=Minimum ATC, which is the lowest possible cost. This means that goods are produced at the lowest possible cost using fewest possible resources.

Perfect Competition in the Short run

In the short run, perfectly competitive markets are more susceptible to earning economic profit

Perfect Competition in the long run

in the long run. The ability to gain profit will encourage new firms to enter the market, while losses influence them to leave the market. This occurs due to the market having easy entry and exit.

Determining total profits or total losses

Formula can be used: Quantity * Price - Average Total Cost, Q(P-ATC).

To Compare the profit maximizing price with the average variable cost

If P=AVC or P>AVC, the firm continues to operate. If AVC<P, then the firm would shut down and are subject to all the losses.