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Flashcards in Perfect Competition + Supply Deck (18)
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1
Q

How can Industry Structure affect prices?

A

High Competition–> Lower Prices / Smaller Difference between Prices offered

2
Q

What are the Main features of a Perfectly Competitive Market?

A

Many Buyers + Sellers
Homogenous Products- firms are Price Takers
No Barriers to Entry/Exit- Freedom of Entry/Exit (Only matters in LR)

3
Q

How much can a firm sell in a perfectly competitive market?

A

As much as it wants at the Prevailing Market Price

P=AR=MR–> a horizontal line

4
Q

Draw Profit Max in a Perfectly Competitive Market

A

MC Upward sloping
P=AR=MR is horizontal = P*
Intersection–> P* & Q*

5
Q

When will a firm Shutdown in the SR?

A

If Revenue does NOT cover its Variable Costs

TR < VC => TR/Q < VC/Q => AR < AVC => P < AVC

6
Q

Given the SR Shutdown condition, what is the firm’s SR Supply Curve?

A
S = 0 below AVC
S = MC above AVC
7
Q

When will a firm Shutdown in the LR?

A

If Revenue does NOT cover its Total Costs

TR < TC => TR/Q < TC/Q => AR < ATC => P < ATC

8
Q

Given the LR Shutdown condition, what is the firm’s LR Supply Curve?

A
S = 0 below ATC
S = MC above ATC
9
Q

Derive the equation for Economic Profit/Loss for a diagram

A
Prof. = TR - TC
=> Prof. = (TR/Q - TC/Q)Q
==> Prof. = (AR - ATC)Q
--> Prof. = (P - ATC)Q
NOTE: If SR- change TC--> VC / ATC--> AVC
10
Q

In the LR, what can affect the Competitive Equilibrium

A

Freedom of Entry + Exit

11
Q

How does Freedom of Entry + Exit affect the LR Equilibrium?

A

Economic Profit–> Attracts New Firms

Economic Loss–> Existing firms Leave the market

12
Q

What is the LR Equilibrium characterised by?

A

No Incentive for Entry/Exit
Economic Profit = 0
P = min{LRATC} = min{SRATC}
P = AR = MR = min of ATC (M.E.S)

13
Q

In SR- what is the Industry Supply Curve + where is it?

A

Sum of all MC curves in the Industry
It is Above AVC
S=Sum(i) of MC, ‘i’ firms

14
Q

Why can the position of the LR Industry Supply Curve change?

A

Firms can Leave or Enter the Market

15
Q

What happens to the LR Industry SC if Firms Enter the market?

A

More MC Curves to Sum–> Supply shifts to Right- Increase

16
Q

What happens to the LR Industry SC if Firms Leave the market?

A

Less MC Curves to Sum–> Supply shifts to Left- Decrease

17
Q

How do you form the LR Industry SC?

A

Join all points of LR Equilibrium in Market => LRS

18
Q

How does a Competitive Industry adjust to an Exogenous Shift in Demand?

A

Increased Demand–> Increased MR for firms–> Increases Market Price–> Economic Profits–> Firms attracted to Market–> More MC curves to Sum–> Increased Market Supply–> Decreased Market Price back down but at higher Output