Perfect Competition

Question 1

Characteristics of perfect competition?

Answer 1

• Many buyers and sellers
• Sellers sell identical goods - perfect substitutes
• Each firm that is selling is too small to influence the price so each firm acts as a price taker
• Sellers and buyers are well-informed on the product
• established firms do not have an advantage over newcomers
• No barriers to entry/exit

Question 2

If a firm in PC is a price taker, how is the price determined?

Answer 2

Through the invisible hand

Question 3

What does it mean to be a price taker?

Answer 3

The firm can only sell at this determined price, but as many as they want
Each firm sets DC as perfectly elastic

Question 4

How much do you make in PC?

Answer 4

Normal profit

Question 5

What are the barriers to entry/exit?

Answer 5

There are none

Question 6

What is Q*?

Answer 6

Profit maximising output

Question 7

When demand is perfectly elastic, MR = ?

Answer 7

MR = MC

Question 8

Show that marginal revenue = price

Answer 8

Marginal revenue = ∆total revenue / ∆ Q
= ∆ (P*Q) / ∆ Q
= P

Question 9

What decisions can you make in the short run?

Answer 9

• Whether to produce or shut down

* If you produce, what quantity do you produce (Q*)

Question 10

What decisions can you make in the long run?

Answer 10

• Expand or not

* Leave or stay

Question 11

Where is the break even point?

Answer 11

When TR = TC

Question 12

Where is Q*?

Answer 12

Where MR intersects with MC

Question 13

When is the market efficient?

Answer 13

When P = MC

Question 14

What are the three possibilities regarding profit in the SR?

Answer 14

• Making profit
• Breaking even
• Losing money

Question 15

To stay in the market in SR, what needs to be true?

Answer 15

TR ≥ VC
or MC ≥ AVC
or P ≥ AVC

Question 16

How do you know which of the three possibilities with SR to do?

Answer 16

TR - TC

Question 17

To make profit in SR what must be true?

Answer 17

MR > ATC
P > ATC
TR > TC

Question 18

What is true when making normal profit in SR?

Answer 18

P = ATC

Question 19

What is true when losing in SR?

Answer 19

P < ATC

Question 20

What is the industry’s supply curve?

Answer 20

It is a horizontal summation of individual supply curves

Question 21

Requirements for a price taker:

Answer 21

• Take price as given
• D is horizontal
• Price is constant
• Price = MR
• P = MC is efficiency