Microeconomics Chapter 11
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Perfectly Competitive Market assumptions
- A perfectly competitive market has many buyers and sellers, all firms sell identical
- products, and there are no barriers to new firms entering the market.
What is a price taker?
A firm that is unable to affect the market price
Why does Demand = Price = Marginal Revenue = Average Revenue in a perfectly competitive firm?
Because a perfectly competitive firm is a price taker
Why will a perfectly competitive firm produce until the MR=MC?
To maximize profits
A perfectly competitive firm's profit-maximizing output and rate is where...
... the demand curve intersects the marginal cost curve.
A perfectly competitive firm's profit or loss is determined by...
- ... the position of the ATC curve.
- (Price above ATC=Profit)
- (Price below ATC=Loss)
A firm's short run supply curve...
... is the part of the MC curve above the AVC curve.
Short run shut down point...
... is where the total revenue is less than the total variable costs, OR, the price is less than the average variable cost.
Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in
the long run.
- Firms earn a SR profit so other firms enter
- Shifts the market supply curve to the right (lowers prices)
- eliminates the SR profit.
- Firms lose in the SR so other firms exit
- shifts the market supply curve to the left (raises prices)
- eliminates the SR losses.
Why does perfect competition result in productive efficiency?
In the long run, competitive forces drive the market price to the minimum ATC of the typical firm.
How does perfect competition achieve allocative efficiency?
Firms produce at the point where the marginal cost of producing another unit equals the marginal benefit consumers receive from consuming that unit.
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