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What is the result for a perfectly competitive firm when the price is greater than the average total cost in the long run?
What is the result for a perfectly competitive firm when the price is greater than the average total cost in the long run?
If a firm decides to shut down in the short run, what must be true regarding total revenue and total variable cost?
If a firm decides to shut down in the short run, what must be true regarding total revenue and total variable cost?
Which condition must hold true for a perfectly competitive firm to maximize its profit?
Which condition must hold true for a perfectly competitive firm to maximize its profit?
During the short run, a perfectly competitive firm will continue production as long as:
During the short run, a perfectly competitive firm will continue production as long as:
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How is the short-run market supply curve for a perfectly competitive industry derived?
How is the short-run market supply curve for a perfectly competitive industry derived?
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In the long run, which condition characterizes profit in a perfectly competitive market?
In the long run, which condition characterizes profit in a perfectly competitive market?
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What happens to the supply curve of a perfectly competitive firm if there are changes in its fixed costs?
What happens to the supply curve of a perfectly competitive firm if there are changes in its fixed costs?
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Which of the following is a primary economic incentive for firms to enter a perfectly competitive market?
Which of the following is a primary economic incentive for firms to enter a perfectly competitive market?
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Which statement regarding long-run equilibrium in a market is correct?
Which statement regarding long-run equilibrium in a market is correct?
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In a perfectly competitive market, what indicates a firm should increase its output?
In a perfectly competitive market, what indicates a firm should increase its output?
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If a firm is currently producing at a level where marginal revenue is less than marginal cost, what should it do?
If a firm is currently producing at a level where marginal revenue is less than marginal cost, what should it do?
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What is a primary effect of economic profits in the short run for a competitive market?
What is a primary effect of economic profits in the short run for a competitive market?
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What effect does an increase in fixed costs have on a firm's average total cost curve?
What effect does an increase in fixed costs have on a firm's average total cost curve?
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A monopolist maximizes profit by producing where which condition holds?
A monopolist maximizes profit by producing where which condition holds?
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Which situation results in a deadweight loss in a monopolistic market?
Which situation results in a deadweight loss in a monopolistic market?
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What type of demand curve does a monopolist face?
What type of demand curve does a monopolist face?
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What characterizes a natural monopoly?
What characterizes a natural monopoly?
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How can monopoly power typically be reduced?
How can monopoly power typically be reduced?
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Study Notes
Perfect Competition
- Profit Maximization: A perfectly competitive firm maximizes profit when price (P) equals marginal cost (MC) and is greater than average total cost (ATC).
- Long-run Equilibrium: In the long run, P = MC = ATC, and firms earn zero economic profit.
- Shutdown Point: A firm will shut down in the short run if price (P) falls below average variable cost (AVC).
- Market Supply Curve: The short-run market supply curve for a perfectly competitive industry is the horizontal summation of the marginal cost curves of all firms above the average variable cost (AVC) curve.
- Profit vs. Loss: If P > ATC, the firm earns economic profit. If P > AVC but < ATC, the firm continues to operate but incurs a loss. Fixed Costs don't affect MC, AVC or short run supply
- Entry and Exit: Economic profit attracts new firms into the market, driving down prices and reducing profit. Losses lead to exit, increasing prices and profit.
- Allocative Efficiency: Perfect competition ensures that price reflects consumer willingness to pay, leading to allocative efficiency (P=MC).
- Cost and Output: Increasing output in perfect competition won't influence the market price.
Monopoly
- Profit Maximization: A monopolist maximizes profit where marginal revenue (MR) equals marginal cost (MC).
- Price and Output: Monopolies restrict output and charge a higher price compared to perfect competition.
- Demand Curve: A monopolist faces a downward-sloping demand curve, meaning it must lower price to sell more units.
- Marginal Revenue: A monopolist's marginal revenue is always less than the price.
- Sources of Monopoly Power: Barriers to entry like control of resources, economies of scale, or government granted licenses limit competition.
- Price Discrimination: Charging different prices for the same product in different markets to enhance profit requires market power and prevents resale.
- Deadweight Loss: Underproduction by a monopoly results in a deadweight loss, representing a loss of total surplus to society.
- Natural Monopoly: Long-run average cost decreases over a wide range of output, making it efficient for one firm to serve the market.
- Comparison to perfect competition: Monopolies charge higher prices and produce less output than perfect competitive markets impacting total surplus negatively.
- Reduction of Monopoly Power: Antitrust laws and promotion of competition work towards decreasing monopoly power.
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Description
This quiz covers key concepts of perfect competition, including profit maximization, long-run equilibrium, and the shutdown point of firms. You'll explore how market dynamics work in relation to supply and demand, as well as the conditions for economic profit or loss. Test your understanding of how firms interact in a perfectly competitive market.
