All Flashcards
How does easy entry/exit affect long-run profits?
Easy entry eliminates economic profits; easy exit eliminates economic losses, leading to normal profit.
Why are perfectly competitive firms 'price takers'?
Because there are many small firms and identical products, no single firm can influence the market price.
How does increased demand impact short-run profits?
Increased demand leads to higher market prices, resulting in short-run economic profits for firms.
What happens when firms make short-run losses?
Some firms will exit the market, decreasing supply and increasing the market price.
How does perfect information affect efficiency?
It allows resources to be allocated efficiently, leading to allocative and productive efficiency.
What does P = MC signify?
It signifies allocative efficiency, meaning resources are allocated to their most valued use.
How do identical products impact non-price competition?
With identical products, there is no need for non-price competition like advertising.
How does free entry affect the supply curve?
Free entry shifts the market supply curve to the right, decreasing the equilibrium price.
What happens to the firm's demand curve when market demand increases?
The firm's demand curve shifts upward, reflecting the new market price.
How does a firm decide to shut down in the short run?
If the price is below the average variable cost (AVC), the firm should shut down to minimize losses.
Define Perfect Competition.
Market with many small firms, identical products, no barriers to entry/exit, and firms are price takers.
What are 'price takers'?
Firms that have no control over the market price and must accept the prevailing price.
Define 'Barriers to Entry'.
Obstacles that prevent new firms from entering a market.
What is 'Normal Profit'?
The minimum profit needed to keep a firm in business; zero economic profit.
Define 'Allocative Efficiency'.
Producing goods and services at the optimal quantity, where P = MC.
What is 'Productive Efficiency'?
Producing goods and services at the lowest possible cost, where P = min ATC.
Define 'Economic Profit'.
Total revenue less total cost, including both explicit and implicit costs.
What is a 'Shutdown Point'?
The point where a firm minimizes its losses by stopping production temporarily because the price is below AVC.
What is 'Marginal Revenue'?
The additional revenue gained from selling one more unit.
Define Long-Run Equilibrium in Perfect Competition.
The point where firms earn zero economic profit and are both allocatively and productively efficient.
How does a subsidy affect the market?
It decreases the cost of production, increases supply, and lowers the market price.
How does a tax affect the market?
It increases the cost of production, decreases supply, and raises the market price.
How does price control affect the market?
It creates shortages if set below the equilibrium price or surpluses if set above.
What is the impact of regulations on production costs?
Regulations typically increase production costs, leading to decreased supply and higher prices.
What is the effect of removing barriers to entry?
More firms enter the market, increasing supply and decreasing the market price.
How does a price ceiling affect firms?
If binding, it reduces revenue and can lead to losses, potentially causing firms to exit the market.
How does a price floor affect firms?
If binding, it leads to surpluses, meaning firms may not be able to sell all their product.
How does a tariff affect domestic firms?
It increases the price of imported goods, making domestic firms more competitive.
How do consumer protection laws affect firms?
They increase costs due to compliance but can also enhance reputation and demand.
How does antitrust policy affect firms?
It prevents monopolies and encourages competition, potentially limiting the size and market power of individual firms.