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Questions and Answers
A perfectly competitive firm is a price _____
A perfectly competitive firm is a price _____
taker
What resembles a perfectly competitive market?
What resembles a perfectly competitive market?
the stock market
Perfect competition is the term used to describe...
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...
Economists study perfect competition...
What is the closest to the economist's definition of perfect competition?
What is the closest to the economist's definition of perfect competition?
The result that perfectly competitive firms produce at the lowest per-unit cost is derived from the assumptions of...
The result that perfectly competitive firms produce at the lowest per-unit cost is derived from the assumptions of...
In a market with perfectly competitive firms, the market demand curve is usually ____________ and the demand curve facing each individual firm is __________.
In a market with perfectly competitive firms, the market demand curve is usually ____________ and the demand curve facing each individual firm is __________.
For a perfectly competitive firm, marginal revenue equals average revenue because the...
For a perfectly competitive firm, marginal revenue equals average revenue because the...
In a perfectly competitive industry, influence over price is exerted by...
In a perfectly competitive industry, influence over price is exerted by...
The competitive firm has no influence over price because...
The competitive firm has no influence over price because...
At a perfectly competitive firm's short-run equilibrium level of output...
At a perfectly competitive firm's short-run equilibrium level of output...
In short-run equilibrium, a perfectly competitive firm...
In short-run equilibrium, a perfectly competitive firm...
A firm in short-run equilibrium always earns positive profits if...
A firm in short-run equilibrium always earns positive profits if...
The perfectly competitive firm will shut down in the short run if...
The perfectly competitive firm will shut down in the short run if...
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...
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...
A firm can stay in business while taking a loss in the short-run as long as it covers its...
A firm can stay in business while taking a loss in the short-run as long as it covers its...
A firm will shut down if...
A firm will shut down if...
If a firm shuts down in the short run, its losses are equal to...
If a firm shuts down in the short run, its losses are equal to...
The short-run supply curve of a perfectly competitive firm...
The short-run supply curve of a perfectly competitive firm...
The short-run supply curve of the competitive firm is the firm's...
The short-run supply curve of the competitive firm is the firm's...
If the price falls below minimum SRAVC, the quantity supplied by the firm will be...
If the price falls below minimum SRAVC, the quantity supplied by the firm will be...
The supply curve for a competitive industry is obtained by...
The supply curve for a competitive industry is obtained by...
When a firm leaves a perfectly competitive industry...
When a firm leaves a perfectly competitive industry...
The short-run supply curve of the competitive industry is found by summing the...
The short-run supply curve of the competitive industry is found by summing the...
A firm in a perfectly competitive industry...
A firm in a perfectly competitive industry...
The demand curve in the perfectly competitive industry is _______ sloped.
The demand curve in the perfectly competitive industry is _______ sloped.
When a firm enters the steel industry, the short-run equilibrium price of steel will ______.
When a firm enters the steel industry, the short-run equilibrium price of steel will ______.
Firms entering a competitive industry will cause the price of the product to ____.
Firms entering a competitive industry will cause the price of the product to ____.
Perfectly competitive firms ______ earn zero economic profit in the long-run equilibrium because ________________.
Perfectly competitive firms ______ earn zero economic profit in the long-run equilibrium because ________________.
If the opportunity cost of capital is below the rate of return to capital in the perfectly competitive beauty salon industry...
If the opportunity cost of capital is below the rate of return to capital in the perfectly competitive beauty salon industry...
The difference between zero profit and zero economic profit is that...
The difference between zero profit and zero economic profit is that...
A perfectly competitive firm would be willing to remain in the industry in the long run at zero economic profit because...
A perfectly competitive firm would be willing to remain in the industry in the long run at zero economic profit because...
Zero economic profits for a perfectly competitive firm in the long run means _____
Zero economic profits for a perfectly competitive firm in the long run means _____
The entry of firms into a competitive industry causes the supply curve to __________.
The entry of firms into a competitive industry causes the supply curve to __________.
An increase in demand will cause an increase in industry output in the long run because...
An increase in demand will cause an increase in industry output in the long run because...
The long-run supply curve of an industry equals the industry's ________.
The long-run supply curve of an industry equals the industry's ________.
Regardless of quantity in long-run equilibrium, the industry price cannot exceed the __________.
Regardless of quantity in long-run equilibrium, the industry price cannot exceed the __________.
Firms will continue to enter a competitive industry until __________.
Firms will continue to enter a competitive industry until __________.
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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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