Perfectly Competitive Market
What conditions make a market perfectly competitive?
A market is perfectly competitive if it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
Assume the market for oranges is perfectly competitive. If the demand for oranges increases, will the market supply additional oranges?
If the demand for oranges increases, then the market will supply additional oranges because producers seek the highest return on their investments.
Does the market system result in allocative efficiency?
In the long run, perfect competition results in allocative efficiency because firms produce where price equals marginal cost.
Does the market system result in productive efficiency?
In the long run, perfect competition results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.
Should the firm instead shut down in the short run?
In the short run, the firm should continue to produce because price is greater than average variable cost.
How should firms in perfectly competitive markets decide how much to produce?
Perfectly competitive firms should produce the quantity where the difference between total revenue and total cost is as large as possible.
Which of the following is an expression of profit for a perfectly competitive firm?
Profit for a perfectly competitive firm can be expressed as Profitequals=left parenthesis (P×Q)−(ATC×Q), where P is price, Q is output, and ATC is average total cost.
Suppose the market for cotton is perfectly competitive and that input prices decrease as the industry expands. Characterize the industry's long-run supply curve.
The cotton industry's long-run supply curve will be downward sloping because the long-run average cost of production will be decreasing.
What is the supply curve for a perfectly competitive firm in the short run?
The supply curve for a firm in a perfectly competitive market in the short run is that firm's marginal cost curve for prices at or above average variable cost.
The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00. Suppose the market price is $24.00 per unit. Characterize the firm's profit. If the firm produces ourput, then it will
experience losses