Chapter 6 MGH: Competition

What are features of the demand curve facing a perfectly competitive firm?

-Higher prices make customers buy from a competitor. -One firm in a competitive industry is so small that it cannot change market equilibrium. -Lower prices reduce revenue because the output could all be sold at the current price.

What are some examples of market structures?

-Perfect competition. -Monopoly. -Oligopoly. -Monopolistic competition.

What are the market structures from the least competitive (fewest firms) to the most competitive (highest number of firms)?

1. Monopoly. 2. Duopoly. 3. Oligopoly. 4. Monopolistic competition. 5. Perfect competition.

The market supply curve is the horizontal ______ of all the individual supply curves for a good or service. 1. Subtraction. 2. Summation. 3. Multiplication. 4. Division.

2. Summation.

In the long run, a perfectly competitive firm will earn ______ economic profit. 1. Constant. 2. Zero. 3. Negative. 4. Positive.

2. Zero.

Which of the following is least likely to be characterized as a monopoly? 1. A public utility. 2. Microsoft. 3. Your local coffee shop. 4. The National Football League.

3. Your local coffee shop

A firm that produces the entire market supply of a particular good or service in the market structure is called what?

A monopoly.

Which of the following explains why a perfectly competitive firm has no market power?

A perfectly competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market.

Which of the following best describes monopolistic competition?

A relatively large number of sellers producing similar products but each seller has brand loyalty.

Which of the following best summarizes why a firm in a purely competitive market will not lower its product price?

Charging a price lower than market price would cause its profits to shrink as its competitors continue to charge the market price.

The factors that will shift supply (i.e., the determinants of a firm's supply) do not include what?

Demand Tastes and preferences

A price-setting firm faces a demand curve that is what?

Downward sloping

Which of the following are true in long-run competitive market equilibrium?

Economic profit is eliminated. Price equals minimum average total cost.

The profit-maximizing rule of P=MC states that what?

In the short run, the firm will maximize profit or minimize loss by producing the output at which price equals marginal cost.

Firms in competitive markets face what?

Low barriers to enter

A perfectly competitive firm should produce the amount of output where price equals what?

Marginal cost

A firm will not produce a unit of output when?

Marginal cost exceeds price

When economists sort firms according to the number and relative size of firms in an industry, they are sorting according to?

Market structure

Which of the following is most likely to be characterized as a monopoly? -The corner gas station -Microsoft -Your local coffee shop -IBM

Microsoft

What is true of a perfectly competitive market?

No buyer or seller can have any control over the market price.

Which of the following best describes the concept of a firm with no market power?

One of a large number of firms producing an identical product as every other firm in its industry and only providing a fraction of total market supply

A perfectly competitive firm can maximize its economic profit (or minimize its loss) only by adjusting its what?

Output

A market in which no buyer or seller has market power is called what?

Perfect competition.

The market demand curve for a purely competitive industry does what?

Slopes downward

In a perfectly competitive industry, an increase in the price of firm A's product will cause consumers to?

Substitute products from the many other firms in the industry.

The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus is what?

Supply

Which of the following factors will alter costs and shift the marginal cost (or short-run supply curve) to a new location?

Technology Prices of factor inputs Firm expectations Improvements in technology

The factors that will shift supply (i.e., the determinants of a firm's supply) include what?

Technology The price of factor inputs Expectations

What summarizes why it is possible for a firm to freely enter and exit a perfectly competitive market?

There are no significant legal, technological, financial, or other obstacles prohibiting firms from entry and exit.

Marginal costs eventually what as more units of output are produced?

They rises.

A wage increase will increase marginal costs and shift the supply curve which direction?

To the left

In perfect competition, a firm's economic profit is equal to what?

Total revenue minus total cost

When price is above ______ total cost, the firm incurs an economic profit.

average Reason: Recall the formula for profit or losses that states "profit/loss = (Price - ATC) x quantity." Only when price is greater than or above ATC can there be a profit because a positive value in the parentheses multiplied by some amount of positive output always equals a profit (positive value).

Competition forces firms to produce at output levels at which ______ is minimized.

average total cost

Within perfect competition, an individual firm ______ affect price by changing output. A market as a whole ______ affect price by changing market output.

cannot; can

In long-run competitive market equilibrium, economic profit is ______ and price is equal to the minimum of ______.

eliminated; average total cost

In perfect competition, a firm's demand will be ______ the product's price.

equal to

In an oligopoly there are ____ firm(s).

few

A perfectly competitive firm cannot charge a(n) ______ price than its competitors because consumers could substitute with other perfectly identical products.

higher

If price exceeds marginal cost, a perfectly competitive firm should do what?

increase output to maximize profits.

The demand curve for a perfectly competitive firm is perfectly horizontal because:

it cannot obtain a higher price by restricting its output, nor does it need to lower its price to increase its sales volume

Economic __________ are a signal to producers that they are not using society's scarce resources in the best way. Under certain circumstances these producers should consider shutting down production and exiting the industry.

losses

What is monopolistic competition?

many companies selling similar but not identical products

Because of the law of diminishing returns, ______ cost eventually ______ as more units of output are produced.

marginal; rises

The sum of all firm's marginal cost curves is the ______ supply curve.

market

The sum of the marginal cost curves of all the firms is the ______ supply curve.

market

The selection of the short-run rate of ______ (with existing plant and equipment) is the production decision.

output

A firm's total revenue is calculated as ___ multiplied by quantity sold.

price

Competition, reflected in the entry and exit of firms, eliminates economic profits and losses by adjusting the product ______ to equal the minimum average total cost.

price

In perfect competition, a firm's total profit is equal to its product _____ minus average total cost multiplied by output.

price

The selection of the short-run rate of output (with existing plant and equipment) is the ______ decision.

production

In perfect competition, a firm's economic profit is equal to:

profit per unit multiplied by quantity

The marginal cost curve is the short-run ____ curve for a competitive firm.

supply

The marginal cost curve is the short-run ______ curve for a competitive firm.

supply Reason: The marginal cost curve is the firm's short-run supply curve because marginal or incremental costs can only be incurred when more goods and services are produced or simply stated supplied. Thus, as supply for goods and services increase and decrease, marginal costs increase and decrease, respectively.

Firms within perfect competition are considered to be price ______.

takers

What is market power?

the ability to alter the market price of a good or service

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price

What is marginal cost?

the cost of producing one more unit of a good

A price-setting firm can change market price because ______.

the product it sells is different compared to its competitors' product

A perfectly competitive firm's total revenue (TR) curve will slope ______ and to the ______.

upward; right Reason: A firm's TR curve slopes upward and to the right because at a fixed price multiplied by increasing output, TR becomes larger.