Economics Chapter on Perfect Competition

The price at which the quantity demanded and the quantity supplied are equal, resulting in a balanced market.

The relationship between price and the quantity consumers are willing and able to buy. When prices rise, demand falls, and vice versa.

A change in the price of a good causes movement along the existing demand curve.

A change in any factor other than the price of the good itself causes the entire demand curve to shift.

When the price of one good increases, consumers buy more of a substitute good. For example, if the price of ice cream goes up, people might buy more candy bars.

When the price of a good increases, consumers' purchasing power decreases, leading to a decrease in demand. For example, if the price of ice cream goes up, people might buy less because they have less money to spend.

As a consumer consumes more of a good, the additional satisfaction or happiness from each additional unit decreases. This can influence demand, as people may be less willing to pay the same price for additional units.

Five factors that can shift the demand curve: taste & preferences, number of consumers, price of substitutes, price of complements, and income.

Products for which demand increases when income rises.

Products for which demand decreases when income rises.

Products that are used together, like ice cream cones and ice cream.

Products that can be used in place of each other, like ice cream and candy bars.

The situation where there are many buyers and sellers, each having a negligible impact on the market price.

In perfect competition, firms operate at the market price and sell their products at the price determined by market forces.

The quantity of a good that sellers are willing and able to supply at a given price.

A change in the quantity demanded for a good due to a change in its price. It's represented by a movement along the demand curve.

A shift in the entire demand curve caused by factors other than price. These shifts are driven by changes in consumer tastes, income, price of related goods, consumer expectations, or population.

A decrease in demand caused by factors outside the price, leading to a leftward shift of the demand curve.

An increase in demand caused by factors outside the price, leading to a rightward shift of the demand curve.

A graphic representation showing the positive relationship between the price of a good and the quantity supplied. As the price increases, producers are willing to supply more.

A change in the quantity supplied of a good due to changes in its price. It's represented by a movement along the supply curve.

A shift in the entire supply curve caused by factors other than price. These shifts are driven by changes in the price of resources, technology, government intervention, the number of sellers, or producer expectations.

A decrease in supply caused by factors outside the price, leading to a leftward shift of the supply curve.

An increase in supply caused by factors outside the price, leading to a rightward shift of the supply curve.

The point where the supply and demand curves intersect, indicating the price and quantity at which the quantity supplied and the quantity demanded are equal.

When the quantity demanded exceeds the quantity supplied at a given price. Occurs when the price is below the equilibrium price.

When the quantity supplied exceeds the quantity demanded at a given price. Occurs when the price is above the equilibrium price.

A payment from the government to producers, designed to reduce their costs of production, which in turn encourages them to produce more goods.

The impact of a subsidy on the producer's costs and, thus, their supply.

The total amount of government spending on a subsidy, calculated by multiplying the subsidy per unit by the quantity produced.

An example of a subsidy that aims to reduce the training costs for businesses.

An example of a subsidy that aims to promote the development of renewable energy sources, like solar panels.

An example of a subsidy often seen in developing countries, where the government lowers the cost of essential goods like food and fuel.

An example of a subsidy that aims to assist struggling industries, such as the steel industry.

An example of a subsidy that aims to promote the adoption of wind energy technologies.

A subsidy that aims to support working families by lowering the cost of childcare.

An example of a subsidy that aims to contribute towards the funding of rail transportation.

The original equilibrium price before the government introduces a subsidy.

The new equilibrium price after the government introduces a subsidy.

The price that producers receive after the subsidy, calculated as P2 plus the subsidy.

The quantity produced before the government introduces a subsidy.

The quantity produced after the government introduces a subsidy.

A government payment to producers or consumers, aiming to reduce the price of a product or service.

The amount the consumer benefits from a subsidy in terms of a lower price.

The degree to which the quantity demanded changes in response to a price change.

When demand is relatively insensitive to price changes; small price changes lead to small quantity changes.

When demand is sensitive to price changes; small price changes lead to large quantity changes.

The effect of a subsidy is more likely to increase the quantity traded rather than significantly lower the market price.

The effect of a subsidy is more likely to significantly lower the price rather than increase quantity traded.

Assessing whether a subsidy actually achieves its intended goals.

Does the subsidy improve efficiency, productivity, or create unintended consequences?

The financial cost of implementing a subsidy, including the amount of government spending.

Whether the subsidy generates enough revenue to offset its costs, or whether taxpayers ultimately bear the burden.

Does the subsidy actually address the underlying market failure that it was designed to correct?

The potential for government intervention to have negative unintended consequences.

The potential for subsidies to create dependency, leading firms to rely on state aid instead of becoming self-sufficient.

The unforeseen consequences that can arise from government policies, often impacting areas that were not initially considered.

The value of a good or service as measured in current dollars, without adjusting for inflation.

The value of a good or service adjusted for inflation, reflecting its purchasing power relative to a base year.

The process of converting nominal values to real values by factoring in changes in the price level over time.

The general level of prices for goods and services in an economy.

An increase in the price level, meaning that the purchasing power of money declines.

The situation where the price level remains constant over time.

A decrease in the price level, meaning that the purchasing power of money increases.

The difference between nominal values and real values due to inflation or deflation.

The ratio of the price level in one year to the price level in another year. It's used to convert nominal values into real values.

Used to convert nominal values from one year to another, adjusted for inflation.

The value of a good or service in a given year measured in the price level of a base year, usually a previous year.

The relationship between the quantity of goods and services produced and the price level.

The relationship between the overall demand for goods and services and the price level.

The point where the aggregate supply and aggregate demand curves intersect, representing the equilibrium price level and output in the economy.

A situation where a business has expanded beyond its optimal size, leading to increased long-run average costs.

The point at which a firm's long-run average cost reaches its lowest point, indicating the most efficient scale of production.

The principle that as more units of a variable input (like labor) are added to a fixed input (like capital), the marginal product of the variable input eventually decreases.

The additional output produced by adding one more unit of a variable input.

The total output produced by a firm.

The stage of production where total product is increasing at an increasing rate.

The stage of production where total product is increasing at a decreasing rate.

The stage of production where total product is decreasing.

A control issue arises when it is difficult to monitor employee productivity and output quality effectively, especially in large, complex businesses.

When employees in large organizations feel disconnected and lose morale, leading to decreased productivity and higher costs.

The difficulties in coordinating complex production processes across multiple locations and dealing with internal politics, which can hinder efficiency.

Larger businesses may face higher regulatory costs due to environmental standards, health and safety regulations, and employment laws.

Internal politics can lead to disruptions and inefficiencies within a company.

A situation where a business is operating beyond its optimal size, leading to higher costs and potential decline in efficiency.

The additional output produced by adding one more unit of input.

Resources that are fixed in the short run, meaning their quantity cannot be changed quickly. A pizza oven is a classic example - you can't easily change the number of ovens in the short run.

Resources that can be changed in the short run, such as labor, materials, and energy. For example, a pizza restaurant can easily hire or fire workers.

The short run in economics is a period of time during which at least one resource is fixed. For a pizza restaurant, this means they can't easily change the number of ovens.

The long run in economics is a period of time during which all resources are variable. A pizza restaurant could potentially buy more ovens or even rent out a bigger space in the long run.

The point at which the marginal product starts to decline as you add more and more variable resources.

The phase of production where each additional worker contributes more to total output than the previous worker (increasing marginal product).

The phase of production where each additional worker adds less and less to total output (decreasing marginal product).

The phase of production where the marginal product becomes negative, meaning adding more workers actually decreases total output.

The relationship between the inputs used to produce a good or service (resources) and the outputs produced (the goods and services).

The benefits that arise from specialization and division of labor. With more workers specializing, the productivity of each worker can increase.

The process of dividing a large task into smaller, more manageable tasks that can be performed by specialized workers.

The point at which adding more workers or variable resources actually leads to a decrease in total output.

The ability of a company to produce more output as it increases its scale of production, often leading to lower average costs.

A measure of the percentage change in prices over a specific period of time. For example, if the inflation rate is 2%, prices have increased by 2% compared to the previous period.

The most commonly used measure of inflation, tracking the average change in prices paid by urban consumers for a basket of goods and services.

The year used as a benchmark to compare prices in other years. It's always assigned an index number of 100.

The value of the same basket of goods and services in the year you're looking at, divided by the value of the same basket in the base year, multiplied by 100. This gives you the CPI for that year.

The year that prices haven't changed since the base year, so it has a CPI of 100.

A CPI number greater than 100 indicates that prices have increased since the base year.

A CPI number less than 100 means that prices were lower than they were in the base year.

The collection of goods and services used to calculate the CPI. It should remain consistent across different years.

The year that prices are being compared to. This is not necessarily the base year.

The value of the market basket in the year you're looking at.

The change in the value of the market basket to the specific year relative to the base year. It's the CPI times the price of the basket in the base year divided by 100.

The difference in price between the base year value and the current year value of a specific product or service.

The difference in price between the base year and the current year, divided by the price in the base year.

A measure of the average change in prices paid by urban consumers for a basket of consumer goods and services.

The year used as a reference point when calculating CPI. It's the base year.

The value of the market basket in the base year is $50. Calculate CPI for the year 2001 when the market basket costs $55.

The value of the market basket in the base year is $50. Calculate CPI for the year 1999 when the market basket costs $40.

The value of the market basket is $80 in the base year. Calculate CPI for the year 2010 when the market basket also costs $80.

The value of the market basket in the base year is $80. Calculate CPI for the year 2011 when the market basket costs $92.

The value of the market basket in the base year is $80. Calculate CPI for the year 2012 when the market basket costs $100.

The value of the market basket in the base year is $80. Calculate CPI for the year 2013 when the market basket costs $120.

The value of the market basket in the base year is $80. Calculate CPI for the year 2009 when the market basket costs $72.

The value of the market basket in the base year is $80. Calculate CPI for the year 2008 when the market basket costs $60.

The value of the market basket in the base year is $80. Calculate CPI for the year 2007 when the market basket costs $40.

How can you estimate whether the CPI will be greater than or less than 100?

How does CPI help us understand inflation?

Does CPI directly measure inflation?

The point on a firm's average cost curve where the cost per unit of production is at its lowest.

The curve that shows the cost of producing each additional unit of output. In a competitive market, this curve intersects the average cost curves at their minimum points.

The point where a firm's marginal cost (MC) equals its marginal revenue (MR). This is where a firm maximizes its profits in a competitive market.

The difference between total revenue and total cost. It can be positive (profit), negative (loss), or zero (break-even).

A situation where a firm is not covering its total costs but is still making enough revenue to cover its variable costs. This means the firm should continue producing in the short run.

The point where a firm's average revenue is lower than its average variable cost. In this situation, the firm should shut down its operations in the short run because it is losing more money by producing than by shutting down.

The revenue earned from selling each unit of output. In a perfect competition, this is equal to the market price.

The cost of producing each unit of output.

The cost of producing each additional unit of output (marginal cost) is equal to the revenue earned from selling that unit (marginal revenue).

A firm that is producing in a competitive market where the price is below its average variable cost. This firm should shut down its operation in the short run to minimize losses.

The state where a company is indifferent between producing and shutting down in the short run. This occurs when the losses from continuing production are equal to the fixed costs of shutting down.

Fixed costs are expenses that remain constant regardless of the level of production. They are incurred even if a company produces nothing. Examples include rent, salaries, and insurance premiums.

Variable costs are expenses that change directly with the level of production. They increase as output rises and decrease when production falls. Examples include raw materials, labor, and utilities.

Total costs encompass all expenses incurred in the production process. They are calculated as the sum of fixed costs and variable costs.

The revenue generated from selling a certain quantity of goods or services. It is calculated by multiplying the price per unit by the quantity sold.

In the short run, a firm in perfect competition will continue operating as long as its total revenue exceeds its variable costs. This means that the firm can cover its variable costs and contribute something towards its fixed costs.

A situation where a company is making losses, but continues to operate since it is still covering its variable costs. This usually occurs during a temporary downturn in the market and is considered a short-term strategy.

The point where a company's total revenue equals its total costs. This means that the company is not making a profit or a loss.

The cost incurred when a firm is completely out of business, and there are no more activities taking place. This usually includes fixed costs related to things like contracts and assets.

The difference between total revenue and total costs. A positive profit indicates that the company is making money, while a negative profit signifies a loss.

The cost of producing one additional unit of output. It is calculated as the change in total cost divided by the change in quantity.

The additional revenue generated by selling one more unit of output. It is calculated as the change in total revenue divided by the change in quantity.

The additional satisfaction or utility a consumer gets from consuming one more unit of a good or service.

The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a basket of consumer goods and services. It reflects the cost of living and is used to calculate inflation.

The inflation rate is the percentage change in the CPI over a specific period, typically a year. It tells you how much prices have increased.

When calculating inflation, you cannot simply subtract the old CPI from the new CPI and call it the inflation rate. This is incorrect because the CPI reflects changes in prices relative to a base year, not just the difference between two years.

To calculate the inflation rate between years other than the base year, use the formula: (New CPI - Old CPI) / Old CPI * 100. This calculates the percentage change in prices.

If the base year CPI is 100 and the CPI in another year is 150, the inflation rate is 50%. This means prices have increased by 50% compared to the base year.

If the CPI in year 1 is 80 and the CPI in year 2 is 100, the inflation rate is 25%. It's not 20% because the inflation rate is calculated relative to the starting point.

When calculating inflation rates for consecutive years, we compare the CPI of a year to the CPI of the previous year, not the base year. This gives us year-on-year inflation.

If the CPI in 2010 is 100 and the CPI in 2011 is 115, the inflation rate in 2011 is 15%. This is because prices increased by 15% compared to 2010.

You can't calculate the inflation rate for 2007 if you only know the CPI for 2007 and 2008. You need the CPI for 2006 to calculate the inflation rate.

Inflation can be measured based on either the CPI or market basket data. Both methods can be used interchangeably to calculate inflation.

If the price of a good in 2010 is $40 and $60 in 2011, the inflation rate between these years is 50%. This represents the percentage change in prices.

The year 2007 inflation cannot be calculated because we lack the CPI or market basket data for the year 2006. Without the base year or previous year data, we can't calculate inflation for that year.

In a scenario where the market basket increased from a value of 40 to 60, the inflation rate is 50%. This tells us that the price of the market basket increased by 50%.

The inflation rate measures the average change in prices paid by consumers. It's not necessarily the change in the price of a specific product or service.

While the CPI is a good indicator of inflation, it doesn't capture every single product or service, and therefore may not reflect the exact individual experience of price increases.

Even though a firm is losing money, it's better to keep producing if the revenue brought in covers all variable costs and some fixed costs.

If average revenue (AR) is less than average variable cost (AVC), a company should definitely shut down. They aren't covering their expenses and are losing money.

The shutdown condition doesn't guarantee profitability or even normal profits. A firm can still be losing money even if they choose to produce when AR=AVC.

The condition where average revenue (AR) equals average cost (AC). This indicates that the firm is making normal profits, meaning they're covering all costs and making a reasonable return.

In perfect competition, firms are price takers. They must accept the market price and cannot influence it. In this situation, the average revenue (AR), marginal revenue (MR), and demand curve are all horizontal lines.

When a firm produces less than its efficient scale, it's experiencing diseconomies of scale. In a perfectly competitive market, the market supply curve shifts leftward as some firms exit the market due to losses, leading to a higher market price that benefits remaining firms.

When the average revenue (AR) is greater than average cost (AC), a firm is making supernormal profits. They're making more than just a reasonable profit, but it's not guaranteed to last forever.

If a firm produces more than its efficient scale, they may experience economies of scale, leading to increased profitability. However, the extent of economies of scale depends on the industry.

If a firm produces more than its efficient scale, but the industry is highly competitive, those economies of scale might be short-lived as other firms enter the market. This can lead to falling prices and lower profits.

The long-run supply curve in a perfectly competitive market is upward sloping, indicating that as the market price increases, more firms will enter the market.

If a firm's variable cost is higher than its fixed cost, they should shut down. This means they have to pay more in direct costs of production than in overhead, indicating poor efficiency.

In a perfectly competitive market, firms are price takers and cannot influence market prices, but they can adjust production levels to achieve their desired profits. If they can't cover their variable costs, they should shut down.

In a perfectly competitive market, firms can make supernormal profits in the short run, especially when demand exceeds supply. However, these profits are typically short-lived due to the entry of new firms attracted by the high profits.