Week 9 Flashcards
(33 cards)
are firms in perfectly competitive markets able to control the prices of products they sell and make economic profit in long run
no because firms sell identical products and it is easy for new firms to enter the market
are there any industries that are fully perfectly competitive
no there are not however there are some industries that possess some or most of the characteristics of this type of market
what are the features of a perfectly competitive market
many firms
identical products
high ease of entry
are firms price takers or price makers in a perfectly competitive market
firms are price takers because they are so small in comparison to size of market a change in price makes no impact and if they raise price they lose all business
what is the demand curve for a perfectly competitive firm
the demand curve for a perfectly competitive firm is perfectly elastic so horizontal at the market price
what is the market demand curve for a perfectly competitive market
the market demand curve for a perfectly competitive market is just like a normal demand curve.
how do firms in a perfectly competitive market calculate revenue
market price in a perfectly competitive market equals revenue as it is equal to both average revenue and marginal revenue
what is the profit maximising level of output for a perfectly competitive firm
where the difference between total revenue and cost is the greatest or where MR = MC because MR = P in perfect competition
how is profit shown on the cost curve graph in terms of ATC
the point between where the MC curve crosses the MR curve and the ATC curve is profit with a width from Q sold
what are the 3 possibilites that can occur when a firm is at MR = MC in perfect competition
1: MR (P) > ATC = profit
2: MR (P) = ATC = break even
3: MR (P) < ATC = loss
what is a firm doing when it makes a loss at MR = MC in perfect competition
minimising its loss
what are the 2 choices a firm can make when making a loss
1: continue to produce
2: stop production by shutting down temporarily
when will a firm stop producing
when its total revenue is less then the total variable costs because it can not cover fixed costs
what type of cost is a fixed cost
it is considered a sunk cost because they have already been paid and can not be recovered
why will a firm continue to produce if making a loss but TR > VR
the revenue above variable costs can cover part of the fixed costs resulting in a lower loss then if the firm shut down
what is the maximum loss a firm is willing to accept
the cost of fixed costs
what is the supply curve in the short run for a perfectly competitive firm
the MC curve is the also the supply curve because producers will produce where MR = MC
what is the shutdown point
the shutdown point is where MC or the supply curve crosses the AVC line therefore supply curve is anything on MC above the AVC
what is the market supply curve in perfect competition
the sum of all producer MC curves
if a firm can not cover its economic costs in the long run will it leave or stay in the market
a firm will leave in the long term if it can not cover all economic costs
if firms are making economic profit in a perfectly competitive industry will firms enter or exit the market
firms will enter the market as they see a profit to be made
what happens to economic profit when additional firms enter the market making economic profit in perfect competition
new firms shift supply right reducing price in the process which as a result shrinks the economic profit that was in the industry
do established firms stay in or leave the industry
established firms will stay in the industry as long as they are still making economic profits
when will firms start to leave the industry
if the price falls below the break even point because economic costs are not covered
