16 Questions
In perfect competition, how many firms sell identical products to many buyers?
Many firms sell identical products to many buyers
What advantage do established firms have over new ones in perfect competition?
Established firms have no advantages over new ones
How are sellers and buyers informed about prices in perfect competition?
Sellers and buyers are well informed about prices
What determines the price and output in perfect competition?
Supply and demand in the market determine the price and output
What is the main characteristic of a competitive market in perfect competition?
Fierce and extreme competition with identical products
Why do firms enter and leave a market in perfect competition?
To achieve economic profits or avoid losses
In perfect competition, each firm is a ____________.
price taker
What is the goal of each firm in perfect competition?
Maximize economic profit
Why is the demand for a perfectly competitive firm's product considered perfectly elastic?
Because the firm's output is a perfect substitute for other firms' output
What determines the market price for a perfectly competitive firm?
The equilibrium market price
What does a perfectly competitive firm need to consider in order to make maximum economic profit?
How to minimize production costs
What does the term 'price taker' mean in perfect competition?
It cannot influence the price of a good or service
What is the demand for a perfectly competitive firm's product considered?
Perfectly elastic
What does a perfectly competitive firm aim to do in terms of economic profit?
Maximize it
What can a perfectly competitive firm not do in terms of influencing the market price?
Affect it at all
What type of demand curve does a perfectly competitive firm have?
Horizontal at the market price
Study Notes
Perfect Competition
- In a perfectly competitive market, many firms sell identical products to many buyers.
- Established firms have no advantage over new ones in perfect competition.
Information and Prices
- Sellers and buyers are perfectly informed about prices in perfect competition.
Price and Output Determination
- The price and output in perfect competition are determined by the intersection of the supply and demand curves.
Characteristics of a Competitive Market
- The main characteristic of a competitive market in perfect competition is that there are many firms producing identical products.
Firm Entry and Exit
- Firms enter and leave a market in perfect competition in response to profits and losses.
Firm Behavior
- Each firm in perfect competition is a price taker, meaning it has no influence over the market price.
- The goal of each firm in perfect competition is to maximize economic profit.
- The demand for a perfectly competitive firm's product is considered perfectly elastic, meaning that a small change in price leads to a large change in quantity demanded.
Maximizing Profit
- To make maximum economic profit, a perfectly competitive firm needs to consider the marginal cost of production and the marginal revenue.
Price Takers
- A price taker is a firm that has no influence over the market price, it can only adjust its quantity produced.
- The demand for a perfectly competitive firm's product is considered perfectly elastic.
Economic Profit
- A perfectly competitive firm aims to maximize economic profit by producing at the level where marginal cost equals marginal revenue.
- A perfectly competitive firm cannot influence the market price.
Demand Curve
- A perfectly competitive firm has a horizontal demand curve, indicating that the firm can sell as much or as little as it wants at the market price.
Test your knowledge on perfect competition with this quiz. Learn about the definition, output decisions, price determination, market entry and exit, technological change effects, and efficiency in perfect competition.
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