Mention two characteristics that define how competitive a market is.
Number of firms (many vs. few).
Ease of entry and exit (free vs. barriers).
Mention two characteristics of perfect competition.
Many buyers and many sellers.
Homogeneous (identical) products and free entry/exit.
If there are no barriers for entering or exiting the market
What is the marginal revenue of a firm in a competitive market?
(MR = P): marginal revenue equals the market price (a horizontal demand curve for the firm).
How do competitive firms decide how much to produce in a competitive market?
They choose the quantity where (MR = MC), i.e. where price equals marginal cost (as long as price is greater than AVC in the short run).
What should a firm do if its marginal cost is higher than its marginal revenue?
The firm should reduce output (producing less increases profit).
What should a firm do if its marginal cost is lower than its marginal revenue?
The firm should increase output (producing more increases profit).
What are the profits of competitive firms in the long run? Why?
Zero economic profit (normal profit) in the long run, because free entry and exit drive price to the minimum of average total cost.
When should firms in competitive markets shut down in the short and in the long run?
Short run: shut down if (AVC is over price) (cannot cover variable costs).
Long run: exit if (ATC is over price) (cannot cover total costs).
What would happen in the long term if there were positive profits in a competitive market?
New firms enter, market supply increases, price falls, and profits are driven down to zero economic profit.
What would happen in the long term if there were negative profits in a competitive market?
Firms exit, market supply decreases, price rises, and remaining firms eventually earn zero economic profit.
What happens to the long run equilibrium price and quantity in a competitive market if the price of a substitute good for consumers decreases?
Demand for this good decreases → in the long run some firms exit, total industry quantity falls; in a constant-cost industry, the long-run price returns to its original level (zero economic profit) but with fewer firms and lower total output.
