Perfectly Competitive Market 8.1-1 Flashcards Preview

Econ 2106 Exam 2 > Perfectly Competitive Market 8.1-1 > Flashcards

Flashcards in Perfectly Competitive Market 8.1-1 Deck (13):
1

What is Market Power?

The ability of a firm or a group of firms in a specific market to influence the price and quantity produced of a product.

2

What is one way you know that a firm has market power?

If it can raise the price of the product without losing all its customers to a competitor.

3

What is the second way you know that a firm has market power?

If it can lower the price of the product without attracting the entire market.

4

What determines whether or not a firm has market power?

It depends on how large the firm is relative to the customers.

5

What is perfect competition?

A market is said to be in perfect competition if it is characterized by a large number of small firms selling identical goods and there are no barriers to entry. Perfectly competitive firms are price-takers.

6

In Perfect Competition:

The output of a single firm is small relative to the market demand; the market wants to buy a lot more than one firm can produce.

7

In Perfect Competition continued:

All firms sell identical products and customers do not distinguish between products.

8

What does it matter that competitors produce an identical product?

It matters because when customers care about the color, shape, texture, etc., of a product, they may be willing to pay a slightly higher price for a product that looks better.

9

What is the pricing like when there are a lot of competitors in the market?

There isn't a lot of moving room for prices when competitors produce identical products. They all have to stick to a specific price range.

10

In Perfect Competition continued 2:

There are no barriers to entry. Any firm can enter and exit whenever it would like.

11

Firm and Market demand in Perfect Competition:

Market supply and demand determine the equilibrium price for the product. Firms take price as given.

12

Firm and Market demand in Perfect Competition continued:

If they raise their price they will lose all customers to competitors. Why charge a lower price when they can sell all they produce at market price?

13

An Individual Firm's Demand says:

At the going price, P*, a firm can sell as much output as it wants. The individual demand curve of a perfectly competitive firm is a horizontal line at the market price.