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chapt 8 econ
Terms in this set (20)
A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How "small" is "small"?
Small mean that the firm has no ability to influence the price of its product, and must take the market price as given.
What are the 4 basic assumptions or perfect competition? Explain in words that they imply for a perfectly competitice firm.
1, the product is homogeneous, 2, there are many buyers and sellers, 3, consumers have perfect information, 4, there are no barriers to entry or exit. These assumptions imply that a single firm cannot do much to influence the market, but must accept conditions as it finds them.
What is a "price taker" firm?
One that cannot influence the price of the market, but accept it as a given.
How does a perfectly competitive firm decide what price to charge?
A perfecly competitive firm must charge the going market price, since it has no ability to set prices itself.
What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
If a perfectly competitive firm tries to increase prices, all of its customers will simply switch to another seller.
How does a perfectly competitive firm calculate total revenue?
The quantity of goods sold times the market price.
Briefly explain the reason for the shape of a marginal revenue cure for a perfectly competitive firm.
Its flat for a perfectly competitive fimr, because it cannot influence prices by changing the level of output.
What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
Determined at the point where price equals marginal cost, and the price is set by the marketplace since the firm is a price taker.
How does the average cost curve help to show whether a firm is making profits or losses?
If the average cost curve is below the marginal revenue curve, or the price, at the selected level of outout, the firm will make profits.
What two lines on a cost curve diagram intersect at the zero-profit point?
The average curve and the marginal revenue curve.
Should a firm shut down immediately if it is making losses?
No. The firm should shut down only if its revenues are not able to cover its variable costs. If it is able to cover its variable costs, and perhaps some of its fixed costs, it should stay open in the short run.
How does the average variable cost curve help a firm know whether it should shut down immediately?
If the entire average variable costs curve is higher than the price, then there is no output capable of producing profits or resulting in a loss less than the fixed costs and the firm should shut down.
What two lines on a cost curve diagram intersect at the shutdown point?
The curves of average variable cost (AVC) and marginal cost (MC) intersects and shows price at which the firm would lack revenue to cover variable cost of production.
Why does entry occur?
To allow new firms to enter the industry.
Why does exit occur?
So firms have the opportunty to leave the industry if they are not proffitable.
Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product?
No, because the benefits of the campaign would only accrue over a very short term period. This is because a perfectly competitive market has homogeneity in products an has a large number of buyers and sellers. An individual seller cannot influence the market.
Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?
At a high level of production, marginal cost and average cost of production will rise.
Why will profits for firms in a perfectly competitive industry tend to vanish in the long run?
If a firm is earning economic profits then other firms will enter to also earn profits.
This increases the supply and drives the price down until it is equal to the lowest point on the
Why will losses for firms in a perfectly competitive industry tend to vanish in the long run?
firms that experience losses will have to shut down, reducing supply, and raising the price to the point at the minimum of the average costs curve.
Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?
It implies that producing more cigarettes would require reductions in production elsewhere, and
that the market is producing what consumers most want to buy. It does not imply anything about
whether cigarette consumption is desirable for society, however.
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