Pure Competition Flashcards
(20 cards)
What are the four market models, and how do they differ in terms of competition?
Pure Competition: Many firms, homogeneous products, no price control. Monopolistic Competition: Many firms, differentiated products, some price control. Oligopoly: Few firms, high barriers, price interdependence. Pure Monopoly: Single firm, blocked entry, full price control.
Why is the demand curve for a purely competitive firm perfectly elastic (horizontal)?
Because the firm is a price taker—it can sell any quantity at the market price but cannot influence the price.
What is the relationship between MR, AR, and P in pure competition?
MR = AR = P (all are equal and constant for the firm).
How does a firm maximize profit in the short run under pure competition?
By producing where MR = MC (or P = MC). Alternatively, by maximizing the gap between TR and TC.
What is the break-even point for a firm?
The output level where TR = TC (normal profit, zero economic profit).
When should a firm shut down in the short run?
When P < AVC (cannot cover variable costs). Loss = fixed costs.
If P > AVC but P < ATC, should the firm continue producing? Why?
Yes, because it covers variable costs and contributes to fixed costs (loss is minimized).
What determines the short-run supply curve for a competitive firm?
The portion of the MC curve above AVC.
How does long-run equilibrium differ from short-run equilibrium in pure competition?
In the LR, P = MC = min ATC (zero economic profit due to free entry/exit).
What happens to market price and output when demand increases in a constant-cost industry?
Short run: Price ↑, firms earn profit. Long run: New firms enter → supply ↑ → price returns to original level, output ↑.
Why is the long-run supply curve horizontal in a constant-cost industry?
Because entry/exit does not affect input prices—firms always produce at the same min ATC.
What is productive efficiency, and how does pure competition achieve it?
Producing at the lowest ATC. Achieved because competition forces firms to minimize costs to survive.
Define allocative efficiency and explain how pure competition ensures it.
Resources are allocated to maximize societal welfare (P = MC). Ensures goods produced match consumer preferences.
How do consumer surplus (CS) and producer surplus (PS) relate to efficiency?
CS + PS is maximized at equilibrium, indicating no wasted resources.
What happens in an increasing-cost industry when demand rises?
LR supply slopes upward because input prices rise as industry expands, increasing min ATC.
Why might a decreasing-cost industry have a downward-sloping LR supply curve?
Expansion lowers costs (e.g., economies of scale), reducing min ATC.
How does pure competition ensure dynamic adjustments to changes in technology or tastes?
Firms enter/exit until P = MC restores efficiency (e.g., avocado demand ↑ → price ↑ → entry → supply ↑ → P returns to MC).
What is the triple equality in long-run pure competition?
P = MC = min ATC. Ensures both productive and allocative efficiency.
Why is pure competition considered a benchmark for efficiency?
It achieves productive (min ATC) and allocative (P = MC) efficiency, maximizing societal welfare.
How does non-price competition differ between pure competition and monopolistic competition?
Pure competition: None (homogeneous products). Monopolistic competition: Heavy (branding, advertising).
