What are the three conditions for a market to be perfectly​ competitive?
For a market to be perfectly​ competitive, there must be
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many buyers and​ sellers, with all firms selling identical​ products, and no barriers to new firms entering the market.
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What is a price​ taker?
A price taker is
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a firm that is unable to affect the market price.
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When are firms likely to be price​ takers?
A firm is likely to be a price taker when
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it sells a product that is exactly the same as every other firm
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Explain why it is true that for a firm in a perfectly competitive​ market, the​ profit-maximizing condition MR​ = MC is equivalent to the condition P​ = MC.
When maximizing​ profits, MR​ = MC is equivalent to P​ = MC because
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the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
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Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ​$1.58 per​ kilogram, and his marginal cost of production is ​$1.76 per​ kilogram, which increases with output. Assume Farmer Lane is currently earning a profit.
Can Farmer Lane do anything to increase his profit in the short​ run?
Farmer Lane
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can increase his profit by producing lessless output.
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A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring​ short-run losses, the management is debating whether to continue operations. Alex​ Ferguson, a senior​ manager, feels that this is a temporary phase and the firm should continue operations.
Which of the​ following, if​ true, would support​ Alex's argument?
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The current price of the product covers the variable cost of production.
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What is the difference between a​ firm's shutdown point in the short run and its exit point in the long​ run?
In the short​ run, a​ firm's shutdown point is the minimum point on the
Why are firms willing to accept losses in the short run but not in the long​ run?
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average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve.
There are fixed costs in the short run but not in the long run.
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What is the relationship between a perfectly competitive​ firm's marginal cost curve and its supply​ curve?
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A​ firm's marginal cost curve is equal to its supply curve for prices above average variable cost.
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When are firms likely to enter an​ industry? When are they likely to​ exit?
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Economic profits attract firms to enter an​ industry, and economic losses cause firms to exit an industry.
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What is meant by allocative​ efficiency?
Allocative efficiency is when every good or service
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is produced up to the point where price equals marginal cost.
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What is meant by productive​ efficiency?
Productive efficiency is
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when a good or service is produced at lowest possible cost.
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Briefly discuss the difference between these two concepts.
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Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
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*The graph at right represents the situation of Karl​ Kumquats, a kumquat grower.
Karl is earning
Karl's firm illustrates
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zero economic​ profit, but could have a positive accouting profit.
productive efficiency because price equals average total cost and allocative efficiency because marginal revenue equals marginal cost.
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Does the market system result in allocative​ efficiency?
In the long​ run, perfect competition
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results in allocative efficiency because firms produce where price equals marginal cost.
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An increase in consumer income for a normal good will
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shift demand outward.
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