EC4101 week 10 lecture 1
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Questions and Answers

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?

  • 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?

  • 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?

    <p>Other firms will enter the market, driving profits to zero.</p> Signup and view all the answers

    What is the relationship between marginal revenue (MR), price (P), and marginal cost (MC) in a perfectly competitive market?

    <p>MR equals P, and both equal MC at the optimal output level.</p> Signup and view all the answers

    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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