Podcast
Questions and Answers
Which characteristic is NOT true for firms in a perfectly competitive market?
Which characteristic is NOT true for firms in a perfectly competitive market?
- Goods are standardized and identical across sellers.
- Sellers can influence the market price by adjusting their output. (correct)
- Firms can freely set prices above the market price. (correct)
- There are significant barriers to entry and exit. (correct)
What is the primary condition for a firm in a perfectly competitive market to maximize its profit?
What is the primary condition for a firm in a perfectly competitive market to maximize its profit?
- Produce where MR = MC. (correct)
- Produce where MC = AR.
- Produce where P = AVC.
- Shut down if P > ATC.
What happens to a firm's total cost if it produces zero output in the short run?
What happens to a firm's total cost if it produces zero output in the short run?
- Total cost equals its variable costs.
- Total cost is the sum of fixed and variable costs.
- Total cost becomes zero.
- Total cost equals its fixed costs. (correct)
Under which condition will a firm decide to shut down in the short run?
Under which condition will a firm decide to shut down in the short run?
Why do firms in a perfectly competitive market earn zero economic profit in the long run?
Why do firms in a perfectly competitive market earn zero economic profit in the long run?
What corresponds to a firm's short-run supply curve in a perfectly competitive market?
What corresponds to a firm's short-run supply curve in a perfectly competitive market?
What occurs in a perfectly competitive market if there is an increase in market demand in the short run?
What occurs in a perfectly competitive market if there is an increase in market demand in the short run?
Allocative efficiency in a perfectly competitive market is achieved when:
Allocative efficiency in a perfectly competitive market is achieved when:
Flashcards
Price Takers
Price Takers
In a perfectly competitive market, firms cannot influence the price of the good. They must accept the prevailing market price, and can only adjust their output.
Profit Maximization in Perfect Competition
Profit Maximization in Perfect Competition
The profit-maximizing output for a perfectly competitive firm occurs where the marginal cost of producing one more unit equals the market price. The firm maximizes profit by producing up to the point where the additional cost of producing one more unit equals the additional revenue from selling that unit.
Fixed Costs in the Short Run
Fixed Costs in the Short Run
In the short run, the firm's fixed costs are unavoidable, even if it produces zero output. These costs include expenses like rent or interest payments.
Short-run Shutdown Condition
Short-run Shutdown Condition
Signup and view all the flashcards
Zero Economic Profit in the Long Run
Zero Economic Profit in the Long Run
Signup and view all the flashcards
Short-Run Supply Curve
Short-Run Supply Curve
Signup and view all the flashcards
Short-Run Market Demand Increase
Short-Run Market Demand Increase
Signup and view all the flashcards
Allocative Efficiency
Allocative Efficiency
Signup and view all the flashcards
Study Notes
Perfectly Competitive Markets
- Firms can freely set prices equal to the market price.
- Goods are standardized.
- Entry and exit in the market are not restricted.
- Sellers have no influence on the market price, they are price takers.
Profit Maximization
- The profit-maximizing rule for a firm in a perfectly competitive market is to produce where marginal cost (MC) equals marginal revenue (MR).
- Alternatively, it's where MC = Price (P).
- Firms should not shut down if price (P) is greater than average total cost (ATC).
Short-Run Costs
- If a firm produces no output in the short run, its total cost equals its fixed costs.
- A firm will shut down in the short run if the price is below average variable cost (AVC).
Long-Run Equilibrium
- In the long run, firms in a perfectly competitive market earn zero economic profit.
- Free entry and exit of firms drive profits to zero.
- Price equals average total cost (ATC).
Short-Run Supply Curve
- A firm's short-run supply curve is its marginal cost curve above the minimum average variable cost.
Market Equilibrium
- If market demand increases in a short-run perfectly competitive market, price will increase, and firms will earn positive economic profits.
Allocative Efficiency
- Allocative efficiency occurs in a perfectly competitive market when firms produce where price equals marginal cost.
Example Cost Schedule
- Provided data in the document show a cost schedule for a firm.
- Data includes quantities, total costs, and prices.
- Students are asked to calculate marginal cost, determine the profit-maximizing output level, and calculate the firm's profit.
Shutdown Decision
- Example situation provided in the document with market price, average variable cost, fixed cost, and quantity.
- Students are asked to calculate total revenue, total cost, and profit for the firm and determine whether the firm should shut down.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Test your knowledge on perfectly competitive markets, including firm behavior, profit maximization, and cost structures. This quiz covers key concepts such as marginal cost, average total cost, and long-run equilibrium. Perfect for students studying microeconomics.
