Economics Chapter 9: Competitive Markets

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What shape does the demand curve faced by an individual firm in a perfectly competitive market exhibit?

Downward sloping

Upward sloping to the right

Vertical

Horizontal (correct)

Which of the following statements is true regarding total, average, and marginal revenue for a perfectly competitive firm?

MR equals price. (correct)

AR is greater than MR.

AR decreases as quantity increases.

TR is always less than total costs.

If a perfectly competitive firm increases its output, how would this typically affect the total industry output?

It will cause no change to industry output. (correct)

It will slightly decrease industry output.

It will significantly increase industry output.

It will result in a price decrease in the industry.

What is the formula for calculating total revenue (TR) for a firm?

TR = p x q Signup and view all the answers

In perfect competition, how do average revenue (AR) and marginal revenue (MR) relate to price (p)?

AR is equal to MR, which is equal to p. Signup and view all the answers

What determines the equilibrium price in a competitive market?

The interaction of supply and demand Signup and view all the answers

At what output level does a firm have no incentive to change its output?

When output equals q* Signup and view all the answers

What does the competitive firm’s supply curve correspond to?

Marginal cost curve Signup and view all the answers

What happens at prices below average variable cost (AVC)?

Firms will shut down in the short run. Signup and view all the answers

What relationship exists between the marginal cost (MC) and supply curve of a firm?

The supply curve is identical to the marginal cost curve above AVC. Signup and view all the answers

What is the primary action a competitive industry in long-run equilibrium should take when facing a continual decrease in demand?

Continue operating as long as variable costs are covered. Signup and view all the answers

In a declining industry, what often causes the decline instead of simply being a result of it?

Antiquated equipment that is no longer efficient. Signup and view all the answers

Which of the following correctly describes the impact of shrinking demand on production capacity in an industry?

Capacity shrinks as demand decreases. Signup and view all the answers

What is indicated by the terms SRATC and MC in the context of production in varying cost plants?

Short-Run Average Total Cost and Marginal Cost. Signup and view all the answers

In a competitive industry, what is the significance of managing variable costs effectively during a demand decline?

It enables firms to continue operating without incurring losses. Signup and view all the answers

What occurs when a firm's price is greater than its average total cost (ATC)?

The firm makes positive economic profits. Signup and view all the answers

In what situation will a firm minimize its losses?

When price is less than average total cost (ATC). Signup and view all the answers

What happens if existing firms in the industry experience positive economic profits?

New firms may enter the industry. Signup and view all the answers

What indicates that existing firms have no incentives to exit an industry?

Existing firms are earning zero profits. Signup and view all the answers

What is a key assumption of perfect competition regarding the product sold by firms?

All firms sell a homogeneous product. Signup and view all the answers

Which factor contributes least to the competitiveness of a market's structure?

Individual firm's power to influence market price. Signup and view all the answers

What is the significance of the blue shaded area on a profit-maximizing graph for a firm?

It signifies the economic losses incurred by the firm. Signup and view all the answers

What occurs in a market when existing firms are facing economic losses?

Existing firms are incentivized to exit the industry. Signup and view all the answers

Which statement accurately describes competitive behaviour among firms?

Firms may not engage in competitive behaviour even in competitive markets. Signup and view all the answers

What does the demand curve faced by an individual firm represent?

It is different from the demand curve for the industry as a whole. Signup and view all the answers

How does a firm determine its optimal output level to maximize profit?

By producing where marginal cost equals marginal revenue. Signup and view all the answers

What role do profits play in a competitive industry's long-run equilibrium?

They attract new firms to enter the industry. Signup and view all the answers

What best describes a firm that has positive economic profits?

It is generating more than its opportunity costs. Signup and view all the answers

Which assumption is NOT part of the theory of perfect competition?

Firms can influence market prices. Signup and view all the answers

Which of the following accurately describes a characteristic of firms in a competitive market?

They reach minimum LRAC at a relatively small output level. Signup and view all the answers

How do firms in a competitive market typically respond to losses in the short run?

They may choose to continue operating if they can cover variable costs. Signup and view all the answers

What best describes the supply curve in a competitive industry?

It is the horizontal summation of individual marginal cost curves above the minimum average variable cost. Signup and view all the answers

In a short-run equilibrium of a competitive market, which of the following is true?

Each firm is maximizing its profits at the market price. Signup and view all the answers

What is the situation called when a typical firm in a competitive market covers all its costs but makes no economic profit?

Normal profit Signup and view all the answers

Which of the following conditions must hold for a firm to be maximizing its profits in the short run?

Marginal cost must be equal to price. Signup and view all the answers

What is the outcome for firms in a competitive market when they experience positive economic profits?

More firms will enter the market in the long run. Signup and view all the answers

Which statement about market clearing in a competitive market is correct?

It ensures that there is no surplus or shortage in the market. Signup and view all the answers

During short-run equilibrium, which of the following scenarios can occur in relation to economic profits?

Firms can either achieve zero, positive, or negative economic profits. Signup and view all the answers

When a firm's price is equal to its average total cost in the short run, what is the firm's profit condition?

The firm is achieving normal profit. Signup and view all the answers

Study Notes

Chapter 9: Competitive Markets

This chapter examines perfect competition, outlining key assumptions, firm supply curves, short-run profit/loss determination, and long-run industry equilibrium.

Competitive Market Structure

Competitiveness of a market relates to the influence individual firms have on market prices.
The less power a firm has to affect prices, the more competitive the market structure.

Competitive Behavior

Competitive behavior describes the degree to which firms vie for business.
Example 1: General Motors and Toyota compete, but their market isn't necessarily competitive.
Example 2: Two wheat farmers don't compete directly, but their market is highly competitive.

Significance of Market Structure

Individual firm demand curves can differ from overall industry demand curves.
Market structure greatly impacts market efficiency.
This chapter focuses on competitive market structures.

Assumptions of Perfect Competition

All firms sell a homogenous product.
Consumers fully understand the product and price of each firm.
Each firm operates at a minimum long-run average cost (LRAC) relative to the total industry output.
Firms freely enter and exit the industry.

Demand Curve for a Perfectly Competitive Firm

Individual firms face a horizontal demand curve, even if the overall industry demand curve is downward-sloping.
"Normal" output changes don't significantly affect total industry output.

Total, Average, and Marginal Revenue

Total Revenue (TR): TR = p x q (price multiplied by quantity).
Average Revenue (AR): AR = (p x q) / q = p (price).
Marginal Revenue (MR): MR = ∆TR/∆q = p.
For perfectly competitive firms, AR = MR = p.

Short-Run Decisions

Should the Firm Produce?: A firm should only produce if price exceeds average variable cost (AVC) at some output level.
How Much Should the Firm Produce?: Firms maximize profits by producing at the output level where price (p) equals marginal cost (MC).

Short-Run Supply Curves

A competitive firm's supply curve is its marginal cost curve (above AVC).

Industry Supply Curve

An industry supply curve is created by adding all individual firm supply curves (MC curves) above the minimum of average variable cost (AVC).

Short-Run Equilibrium in a Competitive Market

Two conditions are met in short-run equilibrium: market price clears the market, and each firm maximizes profits at this price.
Three possible profit scenarios exist: zero economic profits, positive economic profits, or negative economic profits (losses).

Long-Run Decisions: Entry and Exit

Positive economic profits attract new firms to enter the market.
Zero economic profit means no incentive for new firms to enter or existing firms to exit.
Economic losses motivate existing firms to exit the market.

Long-Run Equilibrium

Long-run equilibrium occurs when there's no more incentive for entry or exit.
In long-run equilibrium, all existing firms maximize profits and earn zero economic profits.
Firms cannot increase profits by changing the size of production facilities.

Minimum Efficient Scale (MES)

Firms in long-run equilibrium produce at the minimum point of their long-run average cost (LRAC) curves.
This minimum point represents the minimum efficient scale (MES) where average costs are at their lowest.

Demand Shocks and Long-Run Equilibrium

If market demand increases, prices and profits increase. Entry occurs, then prices return to a state of equilibrium.
The new long-run equilibrium may not have the same market price as the original.
It depends on the cost structure of the industry.

Changes in Technology

Technological developments lowering costs can lead to new firms entering and existing firms incurring losses, subsequently exiting.

Declining Industries

A competitive industry in long-run equilibrium facing a decrease in demand should continue operations using existing equipment as long as variable costs are covered.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers key concepts from Chapter 9 on competitive markets, including perfect competition, firm supply curves, and market structure. You'll explore the implications of competition on pricing and efficiency, and analyze examples of competitive behavior in various markets.