Perfect Competition

For a perfectly competitive firm, the market price is equal to

-average revenue -demand -marginal revenue

What are the 4 characteristics of a perfectly competitive market?

-The # of buyers and sellers is large -The product is standardized -The producers are price takers -Easy entry and exit

In a perfectly competitive market, homogeneity means that firms must charge the market price for the goods or the services they produce, because:

-There are hundreds of other perfectly good substitutes -The market is competitve

Economic profit equals:

-Total revenue minus economic costs -Total revenue minus explicit and implicit costs of production

Determine whether the market can reasonably be described as perfectly competitive: 1) Running shoes 2) Cucumbers 3) Cellphones 4) Cotton 5)Chlorine

1) Not a standardized product-No 2) Standardized-Yes 3) Not Standardized-No 4) Standardized-Yes 5) Standardized-Yes

long-run supply curve

A supply curve that represents the long-run relationship between the price and quantity supplied.

Short-run supply curve

A supply curve that represents the short-run relationship between price and qty supplied.

Constant-cost industry

An industry in which the firms' cost structures do not vary with changes in production

long-run equilibrium

Firms do not face incentives to enter/leave the market and they earn a normal profit. Market price = Min. ATC

Price takers

Firms that take or accept the market price and have no ability to influence that price

Profit per unit

PPU = P -ATC π/Q = P - ATC

Profit Maximizing Rule

Produce at the quantity at which Marginal Revenue (MR) = Marginal Cost (MC)

Productive efficiency

Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.

Allocative efficiency

Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost.

Profit (in terms of total revenue and total cost)

Profit (π) = Total Revenue (TR) - Total Cost (TC) If π > 0, generates economic profit If π = 0, generates normal profit If π < 0, firm generates a loss

Profit (in terms of price, average total cost and output)

Profit = Profit per Unit x Output π = (P - ATC) x Q If π > 0, generates economic profit If π = 0, generates normal profit If π < 0, firm generates a loss

average revenue (AR)

Revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold.

Marginal Revenue (MR)

The change in a firm's total revenue that results from a one-unit change in output produced and sold

Economic profit

The level of profit that occurs when total revenue is greater than total cost

Normal Profit

The level of profit that occurs when total revenue is greater than total cost. Indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry.

Loss

Total revenue < total cost

Perfect competition

a market structure in which a large number of firms all produce the same product and no single seller controls supply or prices. Sellers are price takers, can sell as much as they choose at market price and have the ability to easily enter or exit an industry.

By responding to changes in market price, competitive firms produce more of the products we value most and fewer of the products we value least, thereby achieving

allocative efficiency

Total profit equals (__________ revenue minus _____ total cost) multiplied by output

average; average

In a perfectly competitive market, we assume the product is identical in the minds of the

consumers

A perfectly competitive market involves firms that produce identical products. This guarantees

consumers receive the lowest prices

When consumers are relatively sensitive to changes in price

demand is considered elastic

The law of demand implies that the demand curve for a good, service, or resource is _________-sloping

downward

Perfectly competitive firms take as give the __________ price determined in the overall market and sell each unit of output at that price.

equilibrium

A perfectly competitive firm will incur its total _______ cost of production when it shuts down temporarily in the short run.

fixed

If the market price is below the average variable cost, the firm is

losing money in the short run and should shut down

A company can break even and meet operating costs without a loss when it earns ___________ economic profit

normal

A market structure characterized by the interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogeneous, product, is known as:

perfect competition

Understanding _________ _________ markets can help us analyze other types of markets and identify potential inefficiencies that may result.

perfectly competitive

Perfectly competitive markets help us understand how firms make _______ decisions before we move on to more complicated market structures.

production

In the short run, as the price rises

quantity supplied rises

All perfectly competitive firms maximize profits by producing the quantity of output at which the marginal ________ is equal to the marginal costs.

revenue

Normal profit

total revenue = total cost

Economic profit

total revenue minus total cost, including both explicit and implicit costs

shutdown point

The price below which a firm will choose not to operate in the short run. Graphically, occurs where P/MRC intersects MC curve at min. point of AVC.