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Flashcards in Perfect Competition Deck (32):
1

Perfect Competition

Market Structure

2

Perfect Competition Components

# of Firms: Many
Nature of Product: Identical Products
Entry: No barriers
Firm's Control over Price: None

3

Monopolistic Competition

# of Firms: Many
Nature of the product: Similar but not Identical
Entry: Few Barriers
Firm's Control over Price: Some

4

Oligopoly

# of Firms: Few
Nature of the Product: Identical or similar
Entry: Many barriers
Firm's Control over Price: Some

5

Why do we study Perfect Competition?

Benchmark against which other structures are compared
Approximate Description by a number of industries

6

Shutdown

A firm's decision to stop production when market price drops below average variable cost for the profit maximizing Q (where P = MC). Firms that shut down continue to incur fixed costs (e.g., pay rent/capital costs of fixed production factors).

7

Exit (In the Long Run)

A firm's decision to leave the industry entirely. Firms that exit no longer incur any fixed costs

8

Exit and Entry

Firms exit the industry when their economic profit is negative ( if P P^BE)

9

Efficient Scale of Production

In the long

10

*Break Even Price

The price at which a seller earns zero profit when producing the profit maximizing quantity , Break Even Price = Average Cost

11

*Supply Decision

Price = Marginal Cost

12

Short Run Decision

The firm continues to operate in the short run if, at the profit-maximizing quantity (such that P=MC), the price of output exceeds the average variable cost.

13

*Short Run: Shape of Supply Curve

For a competitive firm with an upward sloping marginal cost curve, the competitive firms' short-run supply curve is identical to that part of the short-run marginal cost curve that lies above the average variable cost curve.

14

*Shape of the Short-Run Industry Supply Curve

The short-run industry supply curve is the horizontal sum of all firms' short-run supply curves. The industry supply curve is more elastic than individual supply curves.

15

*Industry in Equilibrium

When individual firms (in a perfectly competitive industry) maximize their profits then the industry is in equilibrium.

16

*Changing Fixed Costs

Because a change in fixed costs affects neither MC nor AVC, it has no effect on short-run / industry supply

17

*Changing Variable Costs

Because a change in variable costs affects both MC and AVC, it will have an effect on equilibrium price and quantity.

18

*Long Run: Firm's Supply Curve Part 1

As long as firm remains in the industry, the long-run supply curve is identical to the long-run marginal cost curve. The firm's supply curve is therefore more elastic in the long run than in the short run.

19

*Long Run Adjustments

In the long run the firm can adjust all production inputs, it can react to price changes in the long run more than in the short run and produce a given item at lower marginal cost than in the short run.

20

*Exit

When the market price is below the firm's average cost, the firm earns a negative profit and wants to exit the industry.

21

*Shape of the Firm's Long-Run Supply Curve

A competitive firm's long-run supply curve is identical to that part of the firm's long-run marginal cost curve that lies about its long-run average cost curve (LRAC).

22

Economic Profit

Total revenue minus total costs, including opportunity costs of being in another industry. Accounting profits in the relevant industry minus the accounting profits of the second-best industry

23

Minimum Efficient Scale; Efficient Scale of Production

Level of output Q minimizing the firm's long-run average costs. The firm's long-run output

24

*Long Run: Shape of Industry Supply Curve

The long-run industry supply curve is flat at the break-even price, Long Run Supply = Break Even Price

25

*Zero- Profit Condition

In long-run equilibrium in a constant-cost industry, all firms earn zero economic profit.

26

*Long-Run Effect of Demand

A shift in demand has no effect on the long-run equilibrium price (yet an effect on quantity). Long-run equilibrium prices are determined by the supply side, not the demand side.

27

*Short-Run Firm Supply

The firm's short-run supply curve is identical to that part of the short-run marginal cost curve that lies above the average variable cost curve.

28

*Short-Run Industry Supply

The short-run indsutry supply curve is the horizontal sum of all firms' short-run supply curves. The industry supply curve is more elastic than individual supply curves.

29

*Long-Run Firm Supply

A competitive firm's long-run supply curve is identical to that part of the firm's long-run marginal cost curve that lies above its long-run average cost curve.

30

*Long-Run Constant-Cost Industry Supply

In long-run equilibrium in a constant-cost industry, the long-run supply curve is flat at the break-even price. All firms earn zero economic profit.

31

*Long-Run supply in an Increasing-Cost Industry

In an increasing-cost industry, the industry long-run supply curve slopes upward

32

*Long-Run Supply in a Decreasing-Cost Industry

In a decreasing-cost industry, the industry long-run supply curve slopes downward.