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Flashcards in Perfect competition Deck (18)
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1
Q

What are the characteristics of a perfectly competitive market?

A

-Many Sellers & Buyers
- Each seller’s good is exactly the same as any other seller’s good
- Sellers & Buyers are “small” relative to the size of the market
“Small”: Generally easy entry & exit firms

2
Q

What are some characteristics of short run perfect competition?

A
  • Some Inputs are fixed and some are variable.
    • E.g Capital is fixed & Labour is variable
  • Variable Costs depend on how much is produced = The sum of all marginal costs
  • Fixed Costs must be paid regardless of level of output = In the short run these are sunk costs
  • The number of firms in a market is fixed
3
Q

Since I’m the short run many firms are potentially producing each with their own supply curve, How do you find the market short run supply curve and what/how can you determine the short run equilibrium price?

A

First make
P = MC
Then you’ll find Q and you multiply the number of firms in your market by the individual q equation and you have your market supply curve

4
Q

How does a firm make profits in the short run?

A

It take the market price as given and supplies until it produces the amount Q, the largest quantity such that MC (Q)

5
Q

What are the two questions to ask considering Profit Maximization?

A
  1. If I produce, how much should I produce?
    • whatever amount as long as MB>MC
    • MB = MR = P produces as long as P>= MC
    • Q is the largest quantity such that MC (Q)
6
Q

What is the difference between a short run shut down and a short run loss?

A

A loss occurs when a firm is making just enough to cover total variable costs ( AR = AVC < TC) & P< unit cost, and has the decision of whether to shut down or hit but in the short run firm should continue to produce if P> AVC
And shutdown is when price is then less than average variable costs, firms in the short run would have to shut down then

7
Q

What is normal profit?

A

When TC = TR and is the minimum profit needed for firms to remain competitive in the long run

8
Q

What does a short run economic shut down look like graphically?

A

P < AVC (Q)

Upward facing ATC and AVC curves with ATC above AVC and MC intersecting both of them but Price is below the AVC

9
Q

What does a short run economic loss look like graphically?

A

AVC(Q)

10
Q

What is short run shut down?

A

-Firm should produce nothing if:
TR(Q) = PxQ < TVC(Q)
P< TVC
MB

11
Q

When does a firm experience a loss?

A

TR(Q) = PxQ < TC(Q)
-(Profit is negative)
TVC(Q)

12
Q

What do short run profits look like?

A
TR(Q*)-TC(Q*)=
{PxQ*} - {[AVC(Q*)xQ*]-TFC} 
When Q*= 0, that is -TFC, therefore no revenue variable costs and you only have the sunk fixed costs 
When Q* = Q 
TR(Q) - TC(Q)=
{PxQ} - {[AVC(Q)xQ] - TFC}
13
Q

What are the major differences between how firms operate in the short run and in the long run?

A

In the long run

  • All Inputs are variable
  • firms can enter and exit as they please but w/ short run the # of firm’s is fixed so they’re only deciding how much to produce ( if anything)
14
Q

What is the key implication of the difference between the short-run and the long run?

A

The key implication is that supply is more elastic in the long term than the short term.

15
Q

What are two assumptions we can make about the long run?

A
  1. Firms have access to the same technologies & input prices
    • this makes the long run supply curve “horizontal” at the minimum of the long run ATC curve
  2. Input prices don’t change as total quantity transacted changes
16
Q

What profits are made in the long-run?

A

No economic profits are made, the goal is just to make a normal profit where TR = TC

17
Q

What does the single firm size have to do with the firm’s Long Run ATC?

A

The firm size (specifically there is one particular size) that minuses a firm’s long run ATC and is derived from a short run ATC curve for a firm operating at that size.

18
Q

What happens when another firm enters the market?

A

It shifts the supply curve and reduces the equilibrium price