Podcast
Questions and Answers
What shape is the demand curve faced by an individual firm in perfect competition?
What shape is the demand curve faced by an individual firm in perfect competition?
How is total revenue (TR) calculated for a perfectly competitive firm?
How is total revenue (TR) calculated for a perfectly competitive firm?
What is the relationship between marginal revenue (MR) and price in a perfectly competitive market?
What is the relationship between marginal revenue (MR) and price in a perfectly competitive market?
What key cost is excluded when calculating accounting profit as opposed to economic profit?
What key cost is excluded when calculating accounting profit as opposed to economic profit?
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How is economic profit calculated?
How is economic profit calculated?
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What characterizes sunk costs?
What characterizes sunk costs?
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A perfectly competitive firm maximizes its profit when which condition is met?
A perfectly competitive firm maximizes its profit when which condition is met?
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In the short run, a perfectly competitive firm should consider shutting down if:
In the short run, a perfectly competitive firm should consider shutting down if:
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What does the short-run supply curve of a perfectly competitive firm represent?
What does the short-run supply curve of a perfectly competitive firm represent?
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In the long run, what is the expected economic profit for a perfectly competitive firm?
In the long run, what is the expected economic profit for a perfectly competitive firm?
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The entry of new firms into a perfectly competitive industry typically happens when:
The entry of new firms into a perfectly competitive industry typically happens when:
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Under what condition is the long-run supply curve in a perfectly competitive industry horizontal?
Under what condition is the long-run supply curve in a perfectly competitive industry horizontal?
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What shape does the demand curve faced by a monopolist have?
What shape does the demand curve faced by a monopolist have?
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Where is the marginal revenue (MR) curve for a monopolist positioned relative to the demand curve?
Where is the marginal revenue (MR) curve for a monopolist positioned relative to the demand curve?
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At what point does a monopolist maximize profit?
At what point does a monopolist maximize profit?
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Study Notes
Perfect Competition
- Demand Curve: The individual firm faces a perfectly elastic (horizontal) demand curve.
- Total Revenue (TR): Calculated as Price × Quantity
- Marginal Revenue (MR): Equal to price (P)
- Accounting vs. Economic Profit: Economic profit differs from accounting profit as accounting profit excludes opportunity costs.
- Economic Profit Calculation: Economic profit = Total Revenue (TR) - (Explicit Costs + Implicit Costs)
- Sunk Costs: Costs already incurred and unrecoverable.
- Profit Maximization (Short Run): Occurs where Marginal Revenue (MR) equals Marginal Cost (MC).
- Shutdown Point (Short Run): A firm should shut down if price falls below Average Variable Cost (AVC).
- Short-Run Supply Curve: The portion of the marginal cost curve above average variable cost (AVC).
- Long-Run Profit: In the long run, a perfectly competitive firm earns zero economic profit .
- Entry and Exit: New firms enter if existing firms are making economic profits, causing prices to fall and profits to decrease; firms leave the market if they incur losses.
- Long-Run Supply Curve: Horizontal if constant returns to scale prevail.
Monopoly
- Demand Curve: The firm faces a downward-sloping demand curve.
- Marginal Revenue (MR): The MR curve lies below the demand curve.
- Profit Maximization: Occurs at the quantity where MR equals MC.
- Barriers to Entry: Factors preventing new firms from entering the market (e.g., economies of scale, legal restrictions, high fixed costs).
- Natural Monopoly: When economies of scale dominate production, making it efficient for only one firm to operate.
- Deadweight Loss: Monopoly results in underproduction compared to perfect competition, leading a loss of total surplus.
- Price Discrimination: Possible when a firm can prevent resale between buyers, charging different prices to different consumers.
- Price vs. Marginal Cost: Monopolists charge a price higher than marginal cost (P > MC).
- Long-Run Profits: Monopoly profits persist because of barriers to entry.
- Welfare Cost: Measured by the reduction in consumer surplus and the deadweight loss from underproduction.
- Perfect Price Discrimination: The firm charges each consumer their maximum willingness to pay, capturing all consumer surplus.
- Output Compared to Perfect Competition: Monopolies produce less output and charge a higher price compared to perfectly competitive markets.
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Description
Test your knowledge on the principles of perfect competition. This quiz covers demand curves, total revenue, profit maximization, and the differences between accounting and economic profit. Explore key concepts like economic profit calculation and the firm's decisions in the short and long run.
