2 Perfect Competition Free Online FlashCards

What conditions define perfect competition?

Many firms sell identical products, firms can enter or leave, and each firm is too small to influence the market price.

What demand curve does an individual competitive firm face?

The firm faces a horizontal demand curve at the market price and cannot raise its price without losing customers to other sellers.

How are price, average revenue, and marginal revenue related for a price taker?

For a price-taking firm, price equals average revenue and marginal revenue: $P = AR = MR$.

How does a price-taking firm choose profit-maximizing output?

It chooses output where marginal revenue equals marginal cost. Since $P = MR$ for a price taker, this means $P = MC$, on the rising portion of the marginal-cost curve.

How is a competitive firm's economic profit calculated?

Economic profit is $\pi = (P - ATC)q$, where $P$ is price, $ATC$ is average total cost, and $q$ is output.

When does a firm shut down in the short run?

It shuts down temporarily and produces zero because revenue would not cover its variable costs.

Why might a firm keep producing when price is below average total cost?

It continues producing: revenue covers variable costs and contributes something toward fixed costs, even though the firm incurs an economic loss.

What is a competitive firm's short-run supply curve?

It is the portion of the firm's marginal-cost curve at or above the minimum of its average-variable-cost curve.

How is market short-run supply determined?

At each price, add the quantities all firms are willing to supply; this is the horizontal sum of their supply curves.

How do entry and exit respond to profit and loss?

Positive economic profit encourages entry, increasing market supply and tending to lower price and profit. Persistent losses encourage exit, reducing supply and tending to raise price and reduce losses.

What characterizes long-run equilibrium in the standard model?

Firms have no incentive to enter or exit and earn zero economic profit. In the standard model, $P = MC = \min LRAC$.

What does zero economic profit mean?

Revenue covers explicit costs and the opportunity cost of the owners' resources; it does not mean owners receive no return.