Microeconomics Vocabulary - Chapter 12: Perfect Competition

Proft

(Price - Average Total Cost) x Quantity = ?

Increase

A decrease in production costs for firms in a perfectly competitive market will cause an (increase/decrease) in firms' marginal revenue.

Shut-Down Price

A firm will cease production in the short run if the market price falls below the ____-____ price, which is equal to the minimum average variable cost

Perfectly Competitive Market

A market in which all market participants are price-takers.

Shut down

A perfectly competitive small organic farm that produces 1,000 cauliflower heads in the short run has an ATC = $6 and AFC = $2. The market price is $3 per head and is equal to MC. In order to maximize profits (or minimize losses), this farm should:

Market price equals minimum ATC

A producer breaks even when

Long-Run Market Equilibrium

A situation when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

Standardized Product

When consumers regard the products of different producers as the same good.

Profit is maximized

When marginal revenue is equal to marginal cost.

Increase, Larger number of firms in industry

When new firms enter the industry, the result is a lower market price and firms will respond by reducing their output, but total industry output will (increase/decrease) because of...?

Shifts to the right

When new firms enter the industry, the supply curve ...

Free Entry and Exit

When new producers can easily enter into an industry and existing producers can easily leave that industry.

Price, Minimum average total cost.

When the _____ exceeds the _______ ______ ______ ____, or the break even price, the firm is profitable.

Short-Run Market Equilibrium

When the quantity supplied equals the quantity demanded, taking the number of producers as a given.

Marginal Cost

Where the minimum AVC and the ______ ____ curve cross is known as the 'shut-down price'

Long-run

____-___ response to an increase in demand is the increase of output by new firms, and the rightward shift of the short-run supply curve.

Short-run

_____-___ response to an increase in demand is an increase in output and the movement of the industry output along the short-run supply curve

Incurs a loss

If the firm produces a quantity at which TR < TC, the firm

Breaks even

If the firm produces a quantity at which TR = TC, the firm

Profitable.

If the firm produces a quantity at which TR > TC, the firm is

Price-Taking Consumer

A consumer whose actions have no effect on the market price of the good or service he or she buys

Perfectly Competitive Industry

An industry in which producers are price takers.

Commodity

Another word for Standardized Product; when consumers regard the products of different producers as the same good.

Marginal Cost

Change in Total Cost / Change in quantity - ?

Cannot, is not

Fixed costs (can/cannot) be changed in the short run and therefore the fixed cost (is/is not) relevant to a firm's decision about whether to produce or to shut down in the short run.

Break-Even Price

For a price-taking firm, the market price at which it earns 0 profit. (Economic Profit)

Does not

If P < minAVC, the firm shuts down in the short run and the firm (does/does not) cover the variable costs.

Indifferent

If P = minAVC, firms are _____ between producing in the short run or not and just cover the variable cost.

Will

If P > minAVC, the firm (will/will not) produce in the short run.

Cover variable costs and some fixed costs.

If The price is between the minAVC and the shut down price, the firm will

Price, minimum average variable cost

If ____ > then ____ ______ ______ ____, the firm should produce in the short run.

$10

If a perfectly competitive gardening shop sells 30 evergreen bushes at a price of $10 per bush, its marginal revenue is:

Market Price

If the _____ _____ exceeds the minimum ATC, the producer is profitable

Incurs a loss

If the firm produces a quantity at which P < ATC, the firm

Breaks even

If the firm produces a quantity at which P = ATC, the firm

Profitable

If the firm produces a quantity at which P > ATC, the firm is

Enter

If the market price is above the break even price, or the minimum ATC of production, firms will (enter/exit) is industry.

Unprofitable

If the market price is less than the minimum ATC, the producer is

Producing

If the price lies between the minimum ATC & the minimum AVC, the firm is better off

Fixed Costs

In the long run, a producer can always eliminate ____ _____ by selling off its plant and equipment

Net Gain

Marginal Revenue - Marginal Cost = ?

Total Revenue

Price x Quantity = ?

Short-Run Individual Supply Curve

Shows how an additional producer's profit maximizing output quantity depends on the market price, taking fixed costs as given

Marginal Revenue Curve

Shows how marginal revenue varies as output varies.

Short-Run Industry Supply Curve

Shows how the quantity supplied by an industry depends on the market price given a fixed number of producers

Long-run Industry Supply Curve

Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

Industry Supply Curve

Shows the relationship between the price of a good and the total output of the industry as a whole.

Price-Taking Firm's Optimal Output Rule

States that a price-taking firm's profit is maximized by producing the quantity og output at which the market price is equal to the marginal cost of the last unit produced.

Optimal Output Rule

States that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

False; P > minATC

T/F - If P < minATC, the firm will be profitable and enter industry in long-run.

True

T/F - In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms.

False, 0

T/F - In a perfectly competitive industry with free entry and exit, each firm will have $500 economic profit in the long-run equilibrium

True

T/F - The long-run market equilibrium of a perfectly competitive industry is efficient; no mutually beneficial transactions go unexploited & costs are minimized, plus resources are not wasted.

True

T/F - if P = minATC, the firm breaks even, & no entry or exit from industry in the long run.

P = ATC = MC

The Minimum-cost out and the minimum average total cost are found where?

Marginal Revenue

The change in total revenue generated by an additional unit of output. (change in revenue/change in output)

Elastic

The long-run industry supply curve is always more (elastic/inelastic) than the short-run industry supply curve.

Higher

The long-run price elasticity of supply is (higher/lower) than the short-run price elasticity whenever there is free entry or exit.

P = MR = MC

The optimal point, or the profit maximizing quantity, of a price-taking firm is equal to

that firms attempt to maximize their total revenue.

The perfectly competitive model assumes all of the following except:

Market Share

The producers fraction of the total industry output accounted for by that producers output.

Market price, break even price

The profit amount, if earned, is found between the _____ ____ and the ____ _____ _____.

1) a rightward movement up along the MC curve 2) increase in price and profit

The response of an existing firm to the increase of demand is (2)

a reduction in price, output, and profit

The response of existing firms to new entrants to the industry is

Marginal cost curve, shut down

The short-run supply curve for a perfectly competitive firm is the _____ ____ _____ above the ____ ____ price.

Market Price, Marginal Cost

To maximize a price-taking firm's profits, produce the quantity of output at which ____ _____ is equal to ______ _____of the last unit produced. (P=MC)

Profit

Total Revenue - Total Cost = ?

Price-Taking Producer

a producer whose actions have no effect on the market price of the good or service it sells.