Perfect Competition and Monopoly Flashcards
(30 cards)
What factors determine the type of market structure?
Number of firms, similarity of products, and ease of entry/exit.
What are the two extreme market structures studied in this topic?
Perfect competition and monopoly.
What are the key assumptions of perfect competition?
Many buyers and sellers, identical products, no barriers to entry or exit.
Are firms in perfect competition price setters or takers?
Price takers – they accept the market price.
What happens if economic profits exist in a perfectly competitive market?
New firms will enter the market.
What is a common real-world example used to illustrate perfect competition?
Agricultural products (e.g. apples).
What is the profit-maximising rule for a firm in perfect competition?
Produce where MR = MC (Marginal Revenue = Marginal Cost).
For a price taker, what is Marginal Revenue equal to?
The market price.
How is profit calculated?
Profit = (Price – ATC) × Quantity.
When should a firm shut down in the short run?
If P < AVC (price is less than average variable cost).
What is the shutdown point?
Where P = AVC – the firm is indifferent between producing and shutting down.
What is the breakeven point?
Where P = ATC – no economic profit or loss.
What happens in the long run if firms earn positive economic profits?
Firms enter the market, driving profits to zero.
What happens in the long run if firms experience economic losses?
Firms exit, reducing supply and restoring zero economic profit.
What does the long-run supply curve look like in a constant-cost industry?
Horizontal.
What is productive efficiency?
Producing at the lowest cost (least resources).
What is allocative efficiency?
Producing what consumers value most (MC = MB).
What is dynamic efficiency?
Improvement over time through innovation and technology.
What defines a monopoly?
One seller with no close substitutes.
: What are common barriers to entry that lead to monopoly?
IP protections, government mandates, resource control, network effects, natural monopoly.
How does a monopolist determine output?
Produces where MR = MC.
Where does a monopolist set price?
On the demand curve above MR.
Why is MR less than price for a monopolist?
Lowering price to sell more reduces revenue on all units.
How do you calculate MR from a table?
MR = Change in Total Revenue / Change in Quantity.
