40 Questions
In the short run, a firm will produce if
price is greater than the shutdown price
In perfect competition, firms stay in business with zero profit because
revenue compensates the owners for the time and money they expend to keep the business going
The short-run supply curve in a competitive market is
the portion of its marginal cost curve that lies above average variable cost
The long-run supply curve in a competitive market is
the marginal cost curve above the minimum point of its average total cost curve
In the long run, a firm exits if
total revenue it would get from producing is less than its total cost
The profit-maximizing level of output for a price-taking firm occurs where
$P = MC$
Economists measure a firm’s economic profit as
total revenue minus total cost (including both explicit and implicit costs)
Accountants measure accounting profit as
the firm’s total revenue minus only explicit costs
The break-even price for a price-taking firm is where
market price equals average variable cost
The long-run equilibrium in perfect competition occurs when
firms are operating at their efficient scale (minimum point of ATC)
Marginal revenue for a price-taking firm is equal to
change in total revenue generated by an additional unit of output. MR = $rac{ riangle TR}{ riangle Q}$
In a perfectly competitive market, what is the characteristic of the product being traded?
It is standardised across sellers
What best describes the market share of individual buyers and sellers in a perfectly competitive market?
Small, with each participant having a negligible impact on market price
What does 'free entry and exit' imply in a perfectly competitive market?
New producers can easily enter into an industry and existing producers can easily leave that industry
What is the profit maximising level of output for a firm in a perfectly competitive market?
$MR = MC$
What is the relationship between total revenue ($TR$) and quantity sold ($Q$) for a firm in a perfectly competitive market?
$TR = P \times Q$
What type of profit is considered when analyzing firms in a perfectly competitive market?
Economic profit, which includes implicit costs
What happens to individual firm's total revenue if they increase their quantity sold in a perfectly competitive market?
It increases proportionally with quantity sold.
What best describes the influence of individual firms on market price in a perfectly competitive market?
No individual firm can influence market price.
What does it mean for buyers and sellers to have perfect information in a perfectly competitive market?
There is high degree of information available to buyers and sellers in the market.
What does it mean for firms to be 'price takers' in a perfectly competitive market?
Firms accept the equilibrium price set by the market.
In a perfectly competitive market, what does it mean for firms to be 'price takers'?
Firms cannot influence the market price and must accept the prevailing market price
What best describes the influence of individual firms on market price in a perfectly competitive market?
Individual firms have no influence on market price
What is the relationship between total revenue ($TR$) and quantity sold ($Q$) for a firm in a perfectly competitive market?
$TR = P \times Q$
What does 'free entry and exit' imply in a perfectly competitive market?
New producers can easily enter the industry and existing producers can easily leave
What type of profit is considered when analyzing firms in a perfectly competitive market?
Economic profit
In a perfectly competitive market, what is the characteristic of the product being traded?
'Homogenous' or standardized product
What happens to individual firm's total revenue if they increase their quantity sold in a perfectly competitive market?
Their total revenue increases proportionally with quantity sold
What best describes the long-run supply curve in a competitive market?
It is perfectly elastic at the minimum average total cost (ATC)
What best describes how individual buyers and sellers are characterized in a perfectly competitive market?
They each have a small market share and are considered price-takers
What best describes how production decisions are made by firms in a perfectly competitive market?
Production decisions are made based on market demand and cost considerations
In perfect competition, what is the relationship between marginal revenue and market price for price-taking firms?
Marginal revenue is equal to market price
What is the profit-maximizing level of output for a firm in a perfectly competitive market?
Where marginal revenue equals marginal cost
What happens to individual firm's total revenue if they increase their quantity sold in a perfectly competitive market?
Total revenue increases at a decreasing rate
What best describes the long-run supply curve in a competitive market?
The marginal cost curve above the minimum point of its average total cost curve
What does it mean for firms to be 'price takers' in a perfectly competitive market?
Firms accept the market price as given and do not have influence over it
What best describes how production decisions are made by firms in a perfectly competitive market?
Firms independently decide on production levels based on their own profit-maximizing objectives
What does 'free entry and exit' imply in a perfectly competitive market?
New firms can freely enter the industry and existing firms can leave if they desire without restriction
What type of profit is considered when analyzing firms in a perfectly competitive market?
Economic profit, which includes both explicit and implicit costs
What is the relationship between total revenue ($TR$) and quantity sold ($Q$) for a firm in a perfectly competitive market?
It is an inverse relationship
Study Notes
Short-Run and Long-Run Supply Curves
- A firm will produce in the short run if the revenue is greater than or equal to variable costs.
- Firms in perfect competition stay in business with zero profit because they have no market power to influence prices.
Profit Maximization
- The profit-maximizing level of output for a price-taking firm occurs where marginal revenue equals marginal cost.
- Economists measure a firm's economic profit as total revenue minus total cost.
- Accountants measure accounting profit as total revenue minus total explicit cost.
Market Structure
- In a perfectly competitive market, the product being traded is homogeneous.
- The market share of individual buyers and sellers is negligible.
- 'Free entry and exit' implies that firms can enter or exit the market without barriers.
Firm Behavior
- The profit-maximizing level of output for a firm in a perfectly competitive market is where marginal revenue equals marginal cost.
- The relationship between total revenue ($TR$) and quantity sold ($Q$) for a firm in a perfectly competitive market is $TR=PQ$, where $P$ is the market price.
- Firms in perfect competition are price takers, meaning they have no influence on market price.
- If a firm increases its quantity sold, its total revenue will increase by the market price.
Market Characteristics
- Buyers and sellers have perfect information in a perfectly competitive market, meaning they have complete knowledge of prices and product characteristics.
- Individual firms have no influence on market price in a perfectly competitive market.
- The long-run supply curve in a competitive market is perfectly elastic, meaning firms can produce at any level at the market price.
Test your knowledge on the characteristics of perfectly competitive markets, where there are many buyers and sellers with small market shares, and the products are standardized across sellers. In this market, both buyers and sellers are price-takers, and individual actions have no effect on the market price.
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