ECON 2023 Perfect Competition
Firms that take or accept the market price and have no ability to influence that price are ___ takers.
price
How many tomatoes will the farmer produce in the market above to maximize profits?
100 pounds To determine profit maximization, the producer should produce where MR = MC. In the market shown, that would be at 100 pounds.
Total revenue equals:
Price x Quantity
Which of the following markets would most closely resemble a perfectly competitive market? Fast food Tomatoes Cell phones Shoes
Tomatoes
Which of the following markets would most closely resemble a perfectly competitive market? Computers Wheat Chlorine Cucumbers Clothing
Wheat Chlorine Cucumbers
The demand for a perfectly competitive firm's product is a horizontal line originating at the market
price
In the short run, as the price rises,:
quantity supplied rises
In increasing-cost industries, the cost of production rises with expanded output and the long-run market supply curve slopes
upward
As the market price decreases, all else held constant, a profit-maximizing firm will (increase/decrease) its production.
decrease
A perfectly competitive market involves firms that are price takers. This guarantees:
consumers receive the lowest prices.
The long-run relationship between the price and the quantity supplied is given by the:
long-run supply curve.
____equals the total revenue minus the total cost.
Profit
For a firm, profit equals total ___ minus total ___
revenue; cost
In a constant-cost, perfectly competitive industry, what happens to price in the short-run if the market demand increases?
The price increases.
When output is produced so that the marginal benefit equals the marginal cost, there is ___ efficiency.
allocative
Allocative efficiency occurs when the goods and services that are most wanted by consumers are produced in such a way that their marginal ___ equals their marginal ___
benefit; cost
The demand curve for a perfectly competitive firm's product is a (vertical/horizontal) line originating at the market price.
horizontal
The demand for a perfectly competitive firm's product is a(n) ___ line originating at the market price.
horizontal
In a constant-cost industry, the long-run supply curve is a(n) ___ line originating at the market price that generates ___ profits for the firms in the industry.
horizontal; normal
In the (short/long) run, when at least one input is fixed, as the price rises so does the level of output supplied.
short
Normal Profit
the level of profit that occurs when total revenue is equal to the total cost. This level 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. Also known as zero economic profit.
If the market above is perfectly competitive and the MR = $2, the profit/loss amount at the profit-maximizing quantity is
-$120
long run supply curve
A supply curve that represents the long-run relationship between price and quantity supplied.
constant cost industry
an industry in which the firms' cost structures do not vary with changes in production
The amount of revenue produced per unit of an output sold is the ___ revenue.
average
Perfect ___ is a market structure characterized by the interaction of large numbers of buyers and sellers in which the sellers produce a standardized or homogeneous product.
competition
In a perfectly competitive market, we assume the product is identical in the minds of
consumers
A perfectly competitive market involves firms that produce identical products. This guarantees:
consumers receive the lowest prices.
In the presence of economic losses, firms (enter/exit) a perfectly competitive market until firms start earning normal profits.
exit
Total revenue minus the ___ and ___ costs of production is economic profit.
explicit; implicit
The demand for a perfectly competitive firm's product is a horizontal line originating at the:
market price.
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.
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
The firm's short-run supply curve is a(n) _____-sloping curve that begins at _____ average variable cost.
upward; minimum
Refer to the two graphs above the answer the following question. Assume the market for office paper is perfectly competitive. What is the profit maximizing quantity and profit for the office paper firm?
40 cases, Profit = −$600 To find the profit-maximizing quantity, set market price = MC (Q = 40). To find profit, use the following formula (P − ATC)*Q = (20 − 35)(40) = -$600
Marginal Revenue
The change in a firm's total revenue that results from one-unit change in output produced and sold
When it shuts down temporarily in the short run, a perfectly competitive firm Multiple choice question.
still incurs its total fixed costs.
A constant-cost industry is an industry in which:
the firms' cost structures do not vary with changes in production.
The demand, the ___ revenue, and the ___ revenue curves for a perfectly competitive firm are the same horizontal line at the market price.
average; marginal
A constant-cost industry is an industry in which the firms' cost structures do not vary with changes in
production
In the long run, perfectly competitive firms achieve ___ and ___ efficiency.
productive; allocative
All firms maximize profits by producing the quantity of output at which the marginal ___ is equal to the marginal ___
revenue; cost
Profit equals (average ___ minus average total ___ ) multiplied by output
revenue; cost
Profit equals the total ___ minus the total ___
revenue; cost
The more (substitutes/complements) there are for a product, the more elastic the demand for that product will be.
substitutes
Profit equals ___ revenue minus ___ cost.
total; total
The firm's short-run supply curve is a(n) __-sloping curve that begins at __ average variable cost.
upward; minimum
The short-run supply curve starts at the minimum average ___ cost.
variable
Assuming the market for office paper is perfectly competitive, what would the long-run market price and output level be in the office paper market?
$30; 60 cases To find the long-run market price and output level, find where MC equals the lowest ATC. This would occur at a price of $30 and a quantity of 60 cases of office paper.
Use the table to answer the question. If the market for apples is perfectly competitive, what market price would result in a normal (zero) profit?
$8.00 A normal profit is when there is a zero profit. This occurs when MR = MC = ATC. In the table, this would occur at a price of $8.
In a constant-cost, perfectly competitive industry, what is the shape of the long-run supply curve?
Horizontal
A firm sustains a loss if:
TR < TC.
Total profit equals ( ___ revenue minus ___ total cost) multiplied by output.
average; average
In a(n) ___ -cost industry, the long-run supply curve is a horizontal line originating at the market ___ that generates normal profits for the firms in the industry.
constant; price
When consumers are relatively sensitive to changes in price,:
demand is considered elastic.
The level of profit that occurs when the total revenue is ___ to the total cost is known as normal profit.
equal
The level of profit that occurs when total revenue is ___ to total cost is known as normal profit.
equal
Profit maximization implies that perfectly competitive firms should expand production up to the point where marginal revenue (equals/exceeds) marginal cost.
equals
The marginal cost is the:
extra or additional cost associated with the production of an additional unit of output
Price Takers
firms that take or accept the market price and have no ability to influence that price
In the presence of ___, firms exit until the market reaches the point at which the firms are generating a ___ profit; then exit stops and the market settles down into its ___ -run equilibrium.
loss; normal; long
In a perfectly competitive market, a single firm is a price taker and therefore can only charge the ______ price.
market
Price takers are firms that take or accept the ___ price and have no ability to influence that price.
market
The ___ supply curve is equal to the sum of the short-run supply curves for all the firms in the ___
market; industry
Profit (maximization/minimization) implies that perfectly competitive firms should expand production up to the point where marginal revenue equals marginal cost.
maximization
The market condition in which firms do not face incentives to enter or exit the market and firms earn a(n) ___ profit is known as long-run equilibrium.
normal
The ___ competition model is the most efficient type of market and is characterized by both productive and allocative efficiency.
perfect
Because perfectly competitive firms are price takers, the marginal revenue is equal to the market
price
Firms that take or accept the market price and have no ability to influence that price are known as ___ takers.
price
In a perfectly competitive market, homogeneity means that firms must charge the market ___ for the goods or the services they produce because there are hundreds of other perfectly good substitutes.
price
Because the marginal revenue equals the market price for perfectly competitive firms, they should produce output until the market ___ equals the marginal ___
price; cost
If an economy is going to produce the goods and services most wanted by society, competitive firms:
produce more of the products we value most and fewer of the products we value least.
All firms maximize ___ by producing the quantity of output at which the marginal revenue is equal to the marginal cost.
profit
When it shuts down temporarily in the short run, a perfectly competitive firm
still incurs its total fixed costs.
In a perfectly competitive market, the price the firm should charge is the market price because the firm is a price
taker
Because perfectly competitive firms are price ___, the marginal revenue is equal to the market price.
takers
Fill in the blank question. Firms that take or accept the market price and have no ability to influence that price are known as price
takers
When the total revenue earned by a firm is less than the total cost of production,:
the firm faces a loss.
Economic Profit
the level of profit that occurs when total revenue is greater than total cost
Loss
the level of profit that occurs when total revenue is less than total cost
In decreasing-cost industries, the cost of production falls with expanded output and:
the long-run market supply curve slopes downward.
Changes in the variable costs of resources will affect:
the marginal costs faced by firms.
Shutdown Point
the price below which a firm will choose not to operate in the short run. Numerically, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost. Graphically, this point occurs where the price, or marginal revenue curve, intersects the marginal cost curve at the minimum point of the average variable cost curve (AVC).
If labor costs increase, a firm's marginal cost curve will shift (upwards/downwards).
upwards
Normal profit is also known as ___ economic profit.
zero
Suppose Carl's Candies sells 100 boxes of candy for $4 each. The total fixed cost of the 100 boxes is $100 and the average variable cost of the 100 boxes is $1.50 per box. Carl's makes a profit per unit of:
$1.50.
Use the table to answer the following question. Assuming the market is perfectly competitive, what is the marginal revenue between 4 and 6 pounds of kale?
$2 To find MR, take the change in total revenue and divide it by the change in quantity. In this example, the numbers are [12-8]/[6-4 = 4/2 = 2
Short-Run Supply Curve
A supply curve that represents the short-run relationship between price and quantity supplied. For a perfectly competitive firm, the portion of the marginal cost curve that is at or above the minimum point of the average variable cost curve.
Marginal revenue is the:
additional revenue associated with the sale of an additional unit of output.
The perfectly competitive model is the most efficient type of market and is characterized by both productive and ___ efficiency.
allocative
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.
In decreasing-cost industries, the cost of production falls with expanded output and the long-run market supply curve slopes (upward/downward).
downward
Total revenue minus the implicit and explicit costs of production is ___ profit.
economic
Zero ___ profit or normal profit is the revenue needed for a company to break even and meet operating costs without a loss.
economic
The market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit is known as ___ -run equilibrium.
long
Suppose Carl's Candies sells 100 boxes of candy for $5 each. The total fixed cost of the 100 boxes is $100 and the average variable cost of the 100 boxes is $1.50 per box. Carl's makes a profit per unit of:
$2.50.
Assuming the market for apples is perfectly competitive, what market price would result in a normal profit?
$4 A normal profit is when there is a zero profit. This occurs when MR = MC = ATC. In the graph above, this would occur at a price of $4.
In a perfectly competitive market, assume the market price is $10 per unit, and the profit-maximizing quantity is 45 units. If the ATC at 45 units is $8, the profit/loss amount at the profit-maximizing quantity is $
$90
Assuming the market for office paper is perfectly competitive, the profit level for the firm in the long run would be $
0 or zero
Use the graph of a perfectly competitive market above to answer the question. If the market for office paper is perfectly competitive, the price for a typical perfectly competitive firm is $
20
Use the table to answer the question. If the MR = $5.00, what is the profit-maximizing quantity and profit amount?
90 pounds, Profit = $81 To find the quantity, find the quantity where MR = MC. This is at a quantity of 90 pounds. To find profit, use the following formula (P − ATC)*Q = (5 − 4.10)(90) = $81.
long run equilibrium
A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms.
Use the table to answer the following question. Which of the following is true about the market for kale if we assume the market is perfectly competitive?
MR = AR = Firm Demand In a perfectly competitive market, MR = AR = Firm Demand. You can also calculate MR by dividing the change in total revenue by the change in quantity. You can calculate AR by dividing TR by the quantity. In both cases, this will equal $2.
A firm should shutdown if:
P < AVC
productive efficiency
Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.
___ efficiency is producing output at the lowest possible average total cost of production.
Productive
The ___, the average revenue, and the marginal revenue curves for a perfectly competitive firm are the same horizontal line at the market price.
demand
The decision to shut down temporarily is a short-run decision, while the decision to ___ an industry can be made only in the long run.
exit
A perfectly competitive firm will incur its total ___ cost of production when it shuts down temporarily in the short run.
fixed
In a perfectly competitive market, we assume the product is (homogeneous/heterogeneous) in the minds of consumers.
homogeneous
In a perfectly competitive market, we assume the product is ___ in the minds of consumers.
homogeneous
As the market price (increases/decreases), all else held constant, a profit-maximizing firm can afford to expand its production.
increases
As the market price of a good ___, all else held constant, a profit-maximizing firm that produces the good can afford to expand its production.
increases
In ___ -cost industries, the cost of production ___ with expanded output and the long-run market supply curve slopes upward.
increasing; increases
Because the ___ revenue faced by the firm is equal to price, average revenue is also constant and equal to price.
marginal
Extra or additional revenue associated with the production of an additional unit of output is the ___ revenue.
marginal
The extra or additional cost associated with the production of an additional unit of output is the ___ cost.
marginal
Total ___ equals price times quantity.
revenue
Average Revenue
revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold.
The long-run relationship between the price and the quantity supplied is given by the long-run ___ curve.
supply
At the shutdown point, the price is equal to the average ___ cost.
variable
The short-run supply curve starts at the minimum average cost.
variable
If the market price is above or equal to the average ___ cost, but below the average ___ cost the firm should keep producing in the ___ run even though it does so at a(n) ___
variable; total; short; loss
A company can break even and meet operating costs without a loss when it earns ___ economic profit.
zero
In a perfectly competitive market, assume the market price is $5 per unit and the profit-maximizing quantity is 70 units. If the ATC at 70 units is $8, what is the profit/loss amount at the profit-maximizing quantity?
−$210 To find profit, you the following formula: (P − ATC)*Q. Profit = (5 − 8)(70) = −210.
Average revenue is the:
amount of revenue per unit of a product sold
___ profit is also known as zero economic profit.
normal
In the presence of ___ profits, firms enter until the market reaches the point at which the firms are generating a(n) ___ profit; then entry stops and the market settles into its ___ -run equilibrium.
economic; normal; long
Identify the characteristics of a perfectly competitive market.
Producers who are price takers Easy entry and exit for firms A standardized product A large number of buyers and sellers
