Perfect Competition Flashcards
(11 cards)
1
Q
Economic profit definition
A
Total revenue- total cost ( includes opportunity costs)
2
Q
4 assumptions of perfect competition
A
- Homogenous products
- Price takers
- Free entry/exit
- Perfect info
3
Q
At what point does perfectly competitive firm produce in short run
A
- P=MC=MR
4
Q
What is the shutdown condition
A
Where price is below average variable costs
5
Q
Explain short run price and output determination of perfect competition
A
- price takers so price= MR determined where d=s
- Firms produce at p/mr=mc to maximise profits and profit shown by shaded area (vertical distance down to average total cost)
6
Q
When are there economic losses in short run
A
When price is below average total costs
7
Q
Explain the whole process of a firm moving towards
A
- Profits from existing firms attracts new entrants thus supply shifts outwards so SMC shifts outwards and there is lower price with less profit
-Then the lower price causes firms to reduce their capital stock and supply (SMC) slightly shifts back up and ATC drops down (diagram) - This adjustment continues until price reaches min point on the LAC
8
Q
Long run equilibrium under perfect competition
A
9
Q
What are external economies of scale
A
Cost changes that arise as the industry gets bigger
10
Q
Examples of external economies
A
- Pool of skilled labour
- Transport costs- economies of density
11
Q
Elasticity of supply equation
A
% change in quantity of supply/ %change in price
