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Questions and Answers
What is a defining characteristic of firms in a perfectly competitive market?
What is a defining characteristic of firms in a perfectly competitive market?
- They produce unique products that differentiate them from competitors.
- They are price takers and cannot influence the market price. (correct)
- They have significant control over market prices.
- They face increasing marginal costs at all levels of output.
What condition must hold for a firm to be considered economically profitable?
What condition must hold for a firm to be considered economically profitable?
- Total revenue exceeds the sum of explicit and implicit costs. (correct)
- Total revenue is greater than total costs but less than accounting profit.
- Total revenue is equal to average total cost.
- Total revenue equals explicit costs.
In perfect competition, when does a firm decide to shut down in the short run?
In perfect competition, when does a firm decide to shut down in the short run?
- When the price is equal to average total cost.
- When the price is below the minimum average variable cost. (correct)
- When marginal revenue equals marginal cost.
- When price is greater than the minimum average variable cost.
What happens to a perfectly competitive firm in the long run if it is earning economic profits?
What happens to a perfectly competitive firm in the long run if it is earning economic profits?
What is the relationship between marginal revenue (MR), price (P), and marginal cost (MC) in a perfectly competitive market?
What is the relationship between marginal revenue (MR), price (P), and marginal cost (MC) in a perfectly competitive market?
Flashcards
Perfect Competition
Perfect Competition
A market where buyers and sellers believe their actions don't affect the market price.
Price Taker
Price Taker
A buyer or seller who accepts the market price without influencing it.
Economic Profit
Economic Profit
Total revenue minus all costs (including implicit/opportunity costs).
Optimal Output Level
Optimal Output Level
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Shutdown Price
Shutdown Price
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Study Notes
Perfect Competition
- Many buyers and sellers, each with a small market share.
- Suppliers and consumers are price takers, unable to influence market price.
- Standardized product (homogeneous) across sellers.
- Free entry and exit of firms.
- Perfect information between buyers and sellers.
Firm's Demand Curve
- Perfectly horizontal.
- Regardless of output, firms receive the market price.
- Total Revenue (TR) = Price (P) x Quantity (Q).
- Profit = TR - Total Cost (TC).
Economic Profit
- Includes both explicit and implicit costs (opportunity costs).
- Profitable only when total revenue exceeds total costs.
- Smaller than accounting profit.
Optimal Output Level
- Marginal Revenue (MR) equals Marginal Cost (MC).
- MR = P = MC in a perfectly competitive market.
Short-Run Firm Behaviour
- Firm produces if price (P) is greater than minimum average variable cost (AVC).
- Shutdown price = minimum average variable cost (AVC).
- If P < minimum AVC, the firm shuts down.
- If ATC (average total cost) is below the price line, the firm breaks even.
- If ATC is above the price line, firm makes a loss but still produces.
Short-Run Supply Curve
- Portion of the firm's marginal cost (SMC) curve above the shutdown point.
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