Perfect Competition Overview
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Questions and Answers

A perfectly competitive firm is a price _____

taker

What resembles a perfectly competitive market?

the stock market

Perfect competition is the term used to describe...

an industry in which numerous firms produce identical products with little to no barriers to entry

Economists study perfect competition...

<p>to establish a benchmark by which to measure the performance of the economy.</p> Signup and view all the answers

What is the closest to the economist's definition of perfect competition?

<p>the fishing industry</p> Signup and view all the answers

The result that perfectly competitive firms produce at the lowest per-unit cost is derived from the assumptions of...

<p>free entry and exit</p> Signup and view all the answers

In a market with perfectly competitive firms, the market demand curve is usually ____________ and the demand curve facing each individual firm is __________.

<p>downward sloping; horizontal</p> Signup and view all the answers

For a perfectly competitive firm, marginal revenue equals average revenue because the...

<p>firm's demand curve is horizontal.</p> Signup and view all the answers

In a perfectly competitive industry, influence over price is exerted by...

<p>the forces of supply and demand.</p> Signup and view all the answers

The competitive firm has no influence over price because...

<p>its output is so insignificant relative to the market as a whole.</p> Signup and view all the answers

At a perfectly competitive firm's short-run equilibrium level of output...

<p>p=MR=MC</p> Signup and view all the answers

In short-run equilibrium, a perfectly competitive firm...

<p>may earn a profit or a loss.</p> Signup and view all the answers

A firm in short-run equilibrium always earns positive profits if...

<p>SRAR &gt; SRAC</p> Signup and view all the answers

The perfectly competitive firm will shut down in the short run if...

<p>Price &lt; average variable costs (P &lt; AVC)</p> Signup and view all the answers

At a firm's profit-maximizing level of output, if its price is $200 and its short-run average total cost is $225, the firm should shut down if...

<p>its short-run average variable cost exceeds $25.</p> Signup and view all the answers

A firm can stay in business while taking a loss in the short-run as long as it covers its...

<p>average variable costs.</p> Signup and view all the answers

A firm will shut down if...

<p>Total costs - total revenue &gt; total fixed costs.</p> Signup and view all the answers

If a firm shuts down in the short run, its losses are equal to...

<p>average fixed costs.</p> Signup and view all the answers

The short-run supply curve of a perfectly competitive firm...

<p>goes through the lowest point on both its short-run average variable cost and its short-run average total cost curves.</p> Signup and view all the answers

The short-run supply curve of the competitive firm is the firm's...

<p>MC curve above the minimum point on the AVC curve.</p> Signup and view all the answers

If the price falls below minimum SRAVC, the quantity supplied by the firm will be...

<p>zero.</p> Signup and view all the answers

The supply curve for a competitive industry is obtained by...

<p>horizontally summing the supply curves of firms in the industry.</p> Signup and view all the answers

When a firm leaves a perfectly competitive industry...

<p>the individual demand curves of remaining firms shift up in the long run.</p> Signup and view all the answers

The short-run supply curve of the competitive industry is found by summing the...

<p>MC curves about AVC of the individual firms in the industry.</p> Signup and view all the answers

A firm in a perfectly competitive industry...

<p>may choose a different input mix in the long run than in the short run.</p> Signup and view all the answers

The demand curve in the perfectly competitive industry is _______ sloped.

<p>negatively</p> Signup and view all the answers

When a firm enters the steel industry, the short-run equilibrium price of steel will ______.

<p>fall.</p> Signup and view all the answers

Firms entering a competitive industry will cause the price of the product to ____.

<p>fall.</p> Signup and view all the answers

Perfectly competitive firms ______ earn zero economic profit in the long-run equilibrium because ________________.

<p>always; firms enter whenever their economic profit is positive and exit whenever it's negative, so in long run equilibrium economic profit must always be zero</p> Signup and view all the answers

If the opportunity cost of capital is below the rate of return to capital in the perfectly competitive beauty salon industry...

<p>resources will flow into the industry.</p> Signup and view all the answers

The difference between zero profit and zero economic profit is that...

<p>economists include opportunity cost in zero economic profit, while accountants do not include opportunity cost in zero profit.</p> Signup and view all the answers

A perfectly competitive firm would be willing to remain in the industry in the long run at zero economic profit because...

<p>revenue is equal to all costs, including the opportunity cost of capital and labor.</p> Signup and view all the answers

Zero economic profits for a perfectly competitive firm in the long run means _____

<p>the firm is in equilibrium.</p> Signup and view all the answers

The entry of firms into a competitive industry causes the supply curve to __________.

<p>shift right.</p> Signup and view all the answers

An increase in demand will cause an increase in industry output in the long run because...

<p>...new firms enter the industry.</p> Signup and view all the answers

The long-run supply curve of an industry equals the industry's ________.

<p>long-run average cost curve.</p> Signup and view all the answers

Regardless of quantity in long-run equilibrium, the industry price cannot exceed the __________.

<p>long-run average cost of supplying that quantity.</p> Signup and view all the answers

Firms will continue to enter a competitive industry until __________.

<p>any excess returns have been competed away.</p> Signup and view all the answers

Study Notes

Perfect Competition Overview

  • A perfectly competitive firm is a price taker, unable to influence market prices.
  • Resembles a competitive market such as the stock market which has numerous buyers and sellers.

Characteristics of Perfect Competition

  • Defined by numerous firms producing identical products with few barriers to entry.
  • Economists study perfect competition to establish a benchmark for economic performance assessments.

Market Dynamics

  • Market demand curve is downward sloping, while individual firm demand curves are horizontal.
  • In perfect competition, marginal revenue equals average revenue due to the firm's horizontal demand curve.
  • Price determination is influenced by the forces of supply and demand.

Short-Run Equilibrium

  • At equilibrium, a competitive firm achieves output where p = MR = MC (price equals marginal revenue equals marginal cost).
  • Firms may incur profits or losses in the short run; positive profits occur when short-run average revenue exceeds short-run average cost (SRAR > SRAC).

Shutdown Conditions

  • Firms shut down in the short run if Price < average variable costs (P < AVC).
  • If a firm shuts down, losses equal average fixed costs.

Supply Curves

  • Short-run supply curve connects the lowest points on short-run average variable cost and short-run average total cost curves.
  • The firm's supply curve is the marginal cost (MC) curve above the minimum point on the AVC curve.
  • If price falls below minimum short-run average variable cost, the quantity supplied by the firm falls to zero.

Industry Response

  • The industry's supply curve results from horizontally summing the supply curves of all firms.
  • If a firm exits the market, it shifts the demand curves of remaining firms upward in the long run.

Long-Run Adjustments

  • Firms in a perfectly competitive industry can adjust input mixes in the long run compared to the short run.
  • The long-run supply curve aligns with the industry’s long-run average cost curve; firms continue entering until excess returns are eliminated.

Economic Profit

  • Perfectly competitive firms earn zero economic profit in long-run equilibrium due to market adjustments; profits lead to new firm entries, while losses result in exits.
  • Understanding the difference between zero profit (accounting profit) and zero economic profit is crucial; the latter includes opportunity costs.

Market Stability

  • In long-run equilibrium, firms may operate at zero economic profit, meaning revenues cover all costs, including opportunity costs.
  • An increase in demand results in long-run output growth as new firms join the industry, shifting the supply curve to the right.

Price Limits

  • Industry prices cannot exceed the long-run average cost of providing any quantity, ensuring market stability.
  • Resources tend to flow into competitive industries when the opportunity cost of capital falls below the rate of return.

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Description

This quiz explores the key concepts of perfect competition, including the characteristics of perfectly competitive firms and market dynamics. Understand how price determination occurs and the implications for short-run equilibrium in competitive markets.

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