p.6
Short Run Supernormal Profit Equilibrium of a Perfectly Competitive Firm
Under what condition can a perfectly competitive firm make supernormal profit in the short run?
When Average Revenue (AR) is greater than Average Cost (AC).
p.3
Demand Curve of a Perfectly Competitive Firm
What is the nature of the demand faced by individual perfectly competitive firms?
The demand is perfectly price elastic.
p.6
Short Run Supernormal Profit Equilibrium of a Perfectly Competitive Firm
What does the profit-maximizing output occur at for a perfectly competitive firm?
At the point where Marginal Cost (MC) equals Marginal Revenue (MR) and MC is rising.
p.6
Short Run Normal Profit Equilibrium of a Perfectly Competitive Firm
What happens at the profit-maximizing output when a firm earns normal profit?
At this output, Average Revenue (AR) equals Average Cost (AC), resulting in zero economic profit.
p.6
Short Run Supernormal Profit Equilibrium of a Perfectly Competitive Firm
What is supernormal profit?
Supernormal profit is earned when a firm’s Average Revenue is greater than Average Cost (AR > AC).
p.6
Short Run Normal Profit Equilibrium of a Perfectly Competitive Firm
What is the condition for normal profit in a perfectly competitive firm?
Normal profit is earned when Average Revenue equals Average Cost (AR = AC).
p.6
Short Run Supernormal Profit Equilibrium of a Perfectly Competitive Firm
What is the significance of the shaded area APEB in the context of supernormal profit?
It represents the total profit earned, calculated as (P - A) x Qe.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What factors can change the equilibrium output of firms?
Changes in the cost of production (MC) or revenue (AR) from sales.
p.11
Competitive Strategies of Perfectly Competitive Firms
Why do perfectly competitive firms not engage in price competition?
Due to lack of accumulated supernormal profits to cover potential losses.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What effect does the entry of new firms have on market supply?
Market supply increases, leading to a fall in market equilibrium price.
p.1
Characteristics of Perfect Competition
What is the model of perfect competition based on?
Strict assumptions that do not hold in the real world.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What should a firm do if MC is falling at the output level where MR = MC?
The firm should increase its output to maximize profits.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What should a firm do when MC > MR?
The firm should reduce its output, as it costs more to produce the last unit than the revenue generated from it.
p.3
Demand Curve of a Perfectly Competitive Firm
What is the shape of the market demand curve in a perfectly competitive market?
The market demand curve is downward-sloping due to the Law of Demand.
p.4
Characteristics of Monopoly
How does the MR curve differ for an imperfectly competitive firm?
It is faced with a downward sloping MR curve.
p.11
Long Run Price and Output Decisions of Perfectly Competitive Firms
What happens to supernormal profits in the long run for perfectly competitive firms?
They are eroded through the entry of new firms, leading to only normal profits.
p.7
Short Run Subnormal Profit Equilibrium of a Perfectly Competitive Firm
How is total profit calculated in the case of subnormal profit?
Total profit is calculated as (Average Cost - Price) x Quantity (A - P) x Qe.
p.8
Shut Down Decision of a Perfectly Competitive Firm in the Short Run
What should a firm do if AR < AVC?
The firm should stop production to minimize losses.
p.1
Characteristics of Perfect Competition
What is a real-life example that approximates perfect competition?
Markets for agricultural produce.
p.1
Characteristics of Perfect Competition
What is the typical number of firms in a perfectly competitive market?
A very large number of small firms.
p.3
Revenue Curves of a Perfectly Competitive Firm
What is the formula for average revenue (AR)?
AR = TR / Q, which simplifies to AR = P.
p.8
Short Run Supernormal Profit Equilibrium of a Perfectly Competitive Firm
What is the decision for firms making normal profits?
They should also continue production since the next best alternative yields the same level of profit.
p.2
Characteristics of Perfect Competition
Why are perfectly competitive firms considered price takers?
Because there are no barriers to entry, leading to many small firms with insignificant market share, and they sell homogenous products that are perfect substitutes.
p.2
Demand Curve of a Perfectly Competitive Firm
What is a key feature of the demand faced by firms in a perfectly competitive market?
The demand is perfectly price elastic, meaning it is horizontal.
p.1
Characteristics of Perfect Competition
What does the term 'barriers to entry' refer to?
Conditions that impede potential firms from entering the industry.
p.2
Characteristics of Perfect Competition
What is an example of a market that closely resembles perfect competition?
The agricultural market, where many farms supply homogenous products like carrots.
p.3
Revenue Curves of a Perfectly Competitive Firm
What does marginal revenue (MR) represent?
The change in total revenue (TR) as a result of an additional unit of output sold.
p.7
Short Run Normal Profit Equilibrium of a Perfectly Competitive Firm
What is the definition of normal profit?
Zero economic profit, not zero accounting profit.
p.11
Competitive Strategies of Perfectly Competitive Firms
What is the relationship between price competition strategies and supernormal profits?
Price competition strategies often involve reducing prices and sustaining short-term losses, which PC firms cannot afford.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What is the condition for a perfectly competitive firm to remain in business in the long run?
It must make at least normal profits.
p.3
Revenue Curves of a Perfectly Competitive Firm
What is the relationship between average revenue (AR) and price (P) for perfectly competitive firms?
AR is equivalent to the price per unit, so AR = P.
p.4
Profit Maximising Equilibrium (Under Perfect Competition)
When is a firm's profit maximised?
When it produces at an output level where MC = MR, and MC is rising.
p.1
Profit Maximising Equilibrium (Under Perfect Competition)
What happens to profits as new firms enter a perfectly competitive market?
Profits drop until firms are making normal profit.
p.1
Demand Curve of a Perfectly Competitive Firm
What type of demand curve do perfectly competitive firms face?
A perfectly elastic (horizontal) demand curve.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What happens to firms making supernormal profits in the long run?
New firms enter the industry, attracted by the supernormal profits.
p.8
Shut Down Decision of a Perfectly Competitive Firm in the Short Run
What are fixed costs?
Costs that do not vary with output, such as rent.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What occurs when firms are making subnormal profits over a prolonged period?
Firms will attempt to exit the industry.
p.4
Profit Maximising Equilibrium (Under Perfect Competition)
What is the condition for a firm to be in equilibrium under perfect competition?
There is no incentive to move away from its price and/or output level, ceteris paribus.
p.3
Revenue Curves of a Perfectly Competitive Firm
How is total revenue (TR) calculated for perfectly competitive firms?
TR = P × Q, where P is the price per unit and Q is the output of the firm.
p.1
Characteristics of Perfect Competition
What type of products do perfectly competitive firms sell?
Homogeneous products that are perfect substitutes.
p.1
Characteristics of Perfect Competition
Why do perfectly competitive firms have no market power?
Each firm produces an insignificant share of the total output.
p.7
Short Run Normal Profit Equilibrium of a Perfectly Competitive Firm
What does the Average Cost curve being tangential to the Average Revenue curve indicate?
It indicates normal profit equilibrium at point E.
p.7
Short Run Subnormal Profit Equilibrium of a Perfectly Competitive Firm
What condition leads to subnormal profit in a perfectly competitive firm?
When Average Revenue is less than Average Cost (AR < AC).
p.11
Long Run Price and Output Decisions of Perfectly Competitive Firms
What are the long run equilibrium positions of the industry and firm in perfect competition?
Points A and E respectively.
p.8
Shut Down Decision of a Perfectly Competitive Firm in the Short Run
What factors do firms consider when making a shut down decision?
Average variable costs in relation to average revenue.
p.7
Short Run Subnormal Profit Equilibrium of a Perfectly Competitive Firm
At what output level does a perfectly competitive firm maximize profit?
At the output level where Marginal Cost equals Marginal Revenue (MC = MR).
p.7
Short Run Subnormal Profit Equilibrium of a Perfectly Competitive Firm
What does the shaded area PABE represent in the context of subnormal profit?
It represents the total subnormal profit per unit.
p.7
Short Run Subnormal Profit Equilibrium of a Perfectly Competitive Firm
What is the relationship between Total Revenue and Total Cost at subnormal profit equilibrium?
Total Revenue is less than Total Cost (TR < TC).
p.11
Characteristics of Perfect Competition
What is the effect of lack of barriers to entry (BTE) on perfectly competitive firms?
It prevents firms from accumulating continuous supernormal profits.
p.8
Shut Down Decision of a Perfectly Competitive Firm in the Short Run
What are variable costs?
Costs that vary directly with the level of output, such as payment on raw materials.
p.8
Shut Down Decision of a Perfectly Competitive Firm in the Short Run
What happens if AR > AVC?
The firm will continue production to minimize losses.
p.11
Demand Curve of a Perfectly Competitive Firm
Why do perfectly competitive firms choose to be price takers?
Because they can sell as much as they wish at the prevailing market price.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What is the condition for long run equilibrium in a perfectly competitive market?
Equilibrium price equals average cost (AR = AC).
p.11
Competitive Strategies of Perfectly Competitive Firms
What is a consequence of the lack of supernormal profits for non-price competition?
Firms lack the ability to conduct costly non-price competition like research and development or advertising.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What happens to the output level of individual firms as new firms enter the market?
Individual firms produce less than before.
p.8
Shut Down Decision of a Perfectly Competitive Firm in the Short Run
What is the situation when AR = AVC?
The firm may continue production or choose to shut down.
What defines a monopoly in terms of market structure?
There is only one seller of a unique good with no close substitutes.
What is an example of an industry with high fixed costs?
Electricity and water distribution or mass rapid transit systems.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What is the significance of the minimum LRAC in a perfectly competitive firm?
Price must equal minimum LRAC for the firm to achieve long run equilibrium.
p.12
Profit Maximising Equilibrium (Under Perfect Competition)
How do perfectly competitive firms compete?
By minimizing costs to avoid shutdown in the short and long run.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What occurs when firms exit the market due to subnormal profits?
Market equilibrium price increases until existing firms make normal profits.
p.12
Characteristics of Perfect Competition
What happens to products sold by perfectly competitive firms over time?
They become identical due to perfect knowledge.
What gives a monopoly firm extensive market power?
The market demand is also the demand for the monopoly firm.
p.10
Competitive Strategies of Perfectly Competitive Firms
What actions can firms take to reduce costs?
Reviewing production methods or rationalisation.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What happens to firms making subnormal profits in a perfectly competitive market?
They will exit the market, causing market supply to decrease.
p.12
Characteristics of Monopoly
What are formidable barriers to entry (BTE)?
Obstacles that prevent other firms from entering the industry.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What is the relationship between price and average revenue in long run equilibrium?
Price equals average revenue and long run average cost (P = AR = LRAC).
p.12
Characteristics of Monopoly
What effect do high barriers to entry have on monopolists' profits?
They allow monopolists to maintain supernormal profits in the long run.
What are natural barriers to entry?
Barriers arising from cost differences in certain industries.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What happens to the market supply when firms exit due to subnormal profits?
Market supply decreases from S1 to S0.
p.10
Profit Maximising Equilibrium (Under Perfect Competition)
What is the new profit-maximizing output after firms exit the market?
Q1, where the market equilibrium price is at P1.
p.10
Long Run Price and Output Decisions of Perfectly Competitive Firms
What ensures that there is no incentive for new firms to enter a perfectly competitive market?
The absence of barriers to entry and exit.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What does it mean when MC = MR?
It means the addition to total revenue from the last unit equals the addition to total cost from producing that last unit.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What does it indicate when MR > MC?
The addition to total revenue from the last unit exceeds the additional cost, so the firm can increase total profits by expanding output.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What types of profits can firms in perfectly competitive markets make in the short run?
Supernormal, normal, or subnormal profits.
p.2
Demand Curve of a Perfectly Competitive Firm
What determines the equilibrium market price in a perfectly competitive market?
The intersection of the market demand and supply curves.
p.4
Revenue Curves of a Perfectly Competitive Firm
How is the MR curve represented for a perfectly competitive firm?
It is simply its demand curve.
p.6
Short Run Supernormal Profit Equilibrium of a Perfectly Competitive Firm
What do the prefixes 'SR' and 'LR' indicate in cost curves?
'SR' refers to short run, while 'LR' refers to long run.
p.4
Profit Maximising Equilibrium (Under Perfect Competition)
What does Marginal Revenue (MR) represent?
The addition to total revenue when one more unit of output is produced and sold.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What are the two conditions necessary for profit maximization?
i) MC = MR; ii) MC must be rising.
p.2
Profit Maximising Equilibrium (Under Perfect Competition)
How does the equilibrium price affect the output decisions of a perfectly competitive firm?
Each firm must accept the prevailing equilibrium market price and will sell at that price regardless of the quantity produced.
p.2
Characteristics of Perfect Competition
What is meant by perfect knowledge in a perfectly competitive market?
Both producers and consumers have complete information about costs, technology, market prices, and product quality, preventing any firm from having a cost advantage.
p.3
Demand Curve of a Perfectly Competitive Firm
What happens if a firm charges a price higher than P=$10?
Consumers will buy from another firm since products are homogeneous, causing the quantity demanded to fall to zero.
p.1
Characteristics of Perfect Competition
What is the significance of no barriers to entry in a perfectly competitive market?
It allows new firms to easily enter and exit the market, ensuring competition.
p.5
Profit Maximising Equilibrium (Under Perfect Competition)
What is the significance of output 0Qe?
It is the firm's equilibrium profit-maximizing output where MC = MR and MC is rising, indicating no incentive to change output.
p.4
Profit Maximising Equilibrium (Under Perfect Competition)
What does Marginal Cost (MC) represent?
The addition to total cost when one more unit of output is produced.
p.9
Long Run Price and Output Decisions of Perfectly Competitive Firms
What is the long run outcome for firms in a perfectly competitive market?
All firms make only normal profits when equilibrium price falls.
p.12
Characteristics of Perfect Competition
What is a key characteristic of perfectly competitive firms regarding knowledge?
All firms have perfect knowledge of non-price competition strategies.
