72 terms

Ch. 23: Perfect Competition


Terms in this set (...)

Market Structure: ____ features of a market that effect the _______ and ________ of the firms within the market
all; behavior; performance

# of sellers, extent of info, entry barriers, and product differentiation
Why is market structure important?
-firm behavior
-price cost margins
Market Power
when the firm can influence the price of the product or the terms in which the product is sold
In a competitive market, _____ ____ will have market power
each firm
In a non-competitive market, the ______ _______ will have market power
individual firm
Perfect Competition
a market structure in which the decisions of individual buyers and sellers have no effect on market price
Perfectly Competitive Firm
firm that is such a small part of the total industry that it cannot affect the price of the product or service that it sells
Price Taker is a _________ firm that must take the _______ of its product as given because the firm __________ influence its _________
competitive; price; cannot; price
Is a Perfect Competitor a Price Taker? Why/Why not?

1) large number of buyers and sellers
2) homogenous products (wheat,corn)
Free entry means that _______ can start a firm in the industry
Free Entry Examples
sandwich shop, sell crafts, photographer, webpage, android apps
Entry Barrier Examples
car manufacturing, diamond mining, gasoline production
If the perfectly competitive firm is a price taker, selling _________ commodity with ________ substitutes, then the individual firm faces a perfectly _________ demand at the going market price
homogenous; perfect; elastic
Demand Curve of the Perfect Competitor (Price Taker)
Perfectly elastic; horizontal line

consumers are sensitive to the firm's price
How is the going (market) price established in a competitive market?
by the interaction of all the suppliers and demanders
A perfect competitor accepts price if: firm raises price, it sells _______; firm lowers price, it earns _______ profit
nothing; less
To decide how much to produce, perfect competitors use the _______ _______ mode
Profit Function
Pi = TR - TC
Losses occur when profits are _______
Total Revenue Function
TR = P x Q

market chooses P; firm chooses Q
Total Cost Function
To find optimal profit when looking at TR and TC, find the _______ gap between the two where ______ > ________
biggest; TR; TC
To find optimal profit using marginal analysis, find the output where ______ = _______
Marginal Revenue
change in total revenue divided by the change in output

MR = change in TR/change in Q
Marginal Cost
change in total cost divided by the change in output

MC = change in TC/change in Q
For a perfectly competitive firm, MR = _______
In a perfectly competitive market, an individual firm ______ affect the market price, no matter how much it sells. Thus, the additional revenue from selling an additional unit is _______ to that market price
cannot; equal
Profit maximization occurs at the output where the ______ between TR and ______ is the _______
gap; TC; biggest

For a competitive firm, this means that profit maximization occurs where P = _____ = M__
Short run average profits are determined by comparing ______ with ____ at the profit-maximizing ____. In the short run, the perfectly competitive firm can make either economic _______ or economic ________
ATC; P; Q; profits; losses
Short Run Profit Equation
pi = q [P - ATC(q*)]

profit equals number of units sold multiplied by the average profit per unit
ATC is a ____ shaped function
Graph a Firm's SR Profit
p 185
MC runs through the __________ of SRATC
Graph a Competitive Firm making an Economic Loss
p 186
As long as the loss from staying in business is _____ than the loss from shutting down, the firm will ________ to produce
less; continue
If a firm goes bankrupt, they must ______ EVERYTHING
A firm exits the industry when the owner ______ its _______.
sells; assets
A firm temporarily shuts down when it ______ _________, but is ______ in business
stops producing; still
Short-Run Break Even Price
price at which a firm's total revenue equals its total costs (both implicit and explicit)

P = min ATC
A firm will make positive economic profits if P ____ minimum ______
>; ATC
A firm will experience negative economic profit (losses) if P ____ minimum _____
<; ATC
Short-Run Shutdown Price
price that just covers average variable costs

occurs at the intersection of the MC and AVC

graphically: P = minimum AVC
If P < minimum AVC
shutdown is short run -- stop producing
If minimum AVC < P < minimum ATC
produce output so p > 0, but have economic losses
Graph a Break Even Price and Shutdown Price
p 187
Why produce if you are not making a profit?
-may be MORE costly to shutdown
-losses may be temporary
When economic profits are zero, a firm can still have positive ______ profits
What do you call the short-run supply curve?
marginal cost curve ; MC
Where does the short run supply curve start in a competitive industry?
the MC at and above the intersection with the SRAVC curve

only above the shut down point
Where is the break even point?
When P hits the bottom of the SRATC curve

P = min ATC
Profits and losses act as a ______ for resources to enter an industry or to leave an industry
Signals are compact ways of conveying information to economic _______ makers
An effective signal no only conveys _______ but also provides the ________ to react appropriately
information; incentive
Economic Profits
signal that tells new competitive firms to enter the market
Economic Losses
signal that tells existing firms to exit the market
Firms will respond to ________ opportunities
Markets have a tendency toward the _________
At break-even, resources _______ enter or exit the market
In competitive long run equilibrium, firms will make ______ economic profits
In the long run, firms enter and leave the industry in response to _______ _________
profit opportunities
If Economic Profits in LR are positive:
- new firms will enter
-industry supply will increase (shift right)
-price falls until profits are zero
If Economic Profits in LR are negative:
-existing firms will exit the industry
-Industry supply decreases (shifts left)
-price rises until profits are zero
LR Equilibrium: In the long run, a firm can ______ the scale of its plant, adjusting the plant size in such a way that it has no further _______ to change; it will do so until profits are ________.
change; incentive; maximized
In the long run, a competitive firm produces where P, MR, MC, SR min average cost, and LR min average costs are ________
Graph a firm's LR Production
p 190
Marginal Cost Pricing: a system of pricing in which the price charged is _____ to the _________ to society of producing one more unit of the good or service in question
equal; opportunity cost

P = MC of the last unit you produced
The opportunity cost of production is the _______ to society
MC; marginal cost
Allocative Efficiency
level of output where P = MC
Allocative Efficiency means that marginal value to consumers _____ the marginal ____ of production. We have produced just the _____ amount.
equals; cost; right
Allocative Inefficiency
-wrong amount produced (DWL)
-could mean that P > MC
-often the result of monopoly or externalities
The wrong amount produced can create _____