PERFECT COMPETITION Flashcards
Allocative Efficiency
Firm is producing amount society wants
price is equal to marginal cost
Productive Efficiency
Firm is producing at the lowest possible cost
Where the ATC is minimized
Constant Cost Industry
Prices of goods don’t increase as other firms enter market
Long Run supply curve is horizontal
4 Characteristics of Perfectly Competitive Markets
Identical Products
No restrictions on exit or entry
Profits ZERO in Long Run
Firm have insignificant effect on industry
What is the Maximizing Profit
When Marginal Cost = Marginal Revenue
In Perfectly Competitive Markets what is the Marginal Revenue
The Price
In Perfectly Competitive Markets what is the Marginal Cost curve
It is the supply curve
Increasing Cost Industry
Factors of production increase with increase demand
Long Run Supply curve slopes UPWARD
What is the MINIMUM EFFICIENT SCALE
smallest output which long-run average reaches lowest level
In perfect competition: small relative to market demand
What is Marginal Analysis and how does it influence supply decision
-Compares MArginal revenue with Marginal Cost
-if MR > MC: increase output and increase profit
-if MR < MC: decrease in output would increase profit
if MR = MC: economic profit is maximized
When would a firm perform a Shutdown
If TVC > Total Revenue
If AVC> Price
What is a Shutdown Point and where does it occur
Price and Quantity at which firm is INDIFFERENT b/w producing or shutting down
Occurs a price/quantity where AVC is Minimum
Describe different scenarios between Price and AVC
If Price > Minimum AVC: firm produces at MC = MR (Price)
If Price rises: firm increases output up along MC
If Price < Minimum AVC: firm shutsdown
If Price = Minimum AVC: firm will shutdown OR keep producing
What is the Economic Loss at a Shutdown
The Total Fixed Cost
EQUATION: ECONOMIC PROFIT
(Price-Average Total Cost) x Quantity
