Perfect Competition Flashcards
(20 cards)
Price taking producer
A producer who’s actions have no effect on the market price
Price taking consumer
A consumer who’s actions have no effect on the market price
Perfectly competitive market
A market in which all participants are price takers
Perfectly competitive industry
An industry in which producers are price takers
Two necessary conditions for perfect competition
Contain many producers none of whom have a large market share
Industry output is a standardized product
Market share
The fraction of the total industry output
Standardized product
When consumers regard the products of different producers as the same good
Free entry and exit
When new producers can easily enter and exit an industry
Marginal revenue
The change in total revenue generated by an additional unit of output
Optimal output rule
Profit is maximized by producing the quantity of output at which the marginal revenue of last unit produced is equal to it’s marginal cost
Price taking firms optimal output rule
Profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
Marginal revenue curve
Shows how marginal revenue varies as output varies
Shit down price
The price which is equal to minimum average variable cost, at which if market price falls below, a firm will cease production
Profitability condition
Minimum ATC = break even price
P > minimum ATC firm profitable - enter long run
P = minimum ATC firm breaks even - no enter or exit in long run
P < minimum ATC firm unprofitable - exit in long run
Production condition
Minimum AVC = shut down price
P > minimum AVC - firm produces in short run
P = minimum AVC - firm is indifferent. Just covers variable costs
P < minimum AVC - firm shuts down in short run
Industry supply curve
The relationship between the price of a good and the total output of the industry
Short run industry supply curve
Shows how the quantity supplied by an industry depends on the market price given a fixed number of producers
Short run market equilibrium
When the quantity supplied equals the quantity demanded
Long run market equilibrium
When the quantity supplied equals the quantity demanded, given sufficient time for entry and exit to occur
Long run industry supply curve
Shows how the quantity supplied responds to the price of each producers have time to enter and exit
