CHAPTER 24
Perfect Competition
Summary
1. What is perfect competition?
· 1. Perfect competition is a market structure in which there are many firms that are producing an identical product and where entry and exit are easy. §1.a
2. What does the demand curve facing the individual firm look like, and why?
· 2. The demand curve of the individual firm is a horizontal line at the market price. Each firm is a price taker. §1.b
3. How does the firm maximize profit in the short run?
· 3. The individual firm maximizes profit by producing at the point where MR 5 MC. §1.c
4. At what point does a firm decide to suspend operations?
· 4. A firm will shut down operations temporarily if price does not exceed the minimum point of the average-variable-cost curve. §1.c
5. When will a firm shut down permanently?
· 5. A firm will shut down operations permanently if price does not exceed the minimum point of the average-total-cost curve in the long run. §1.d
6. What is the break-even price?
· 6. The firm breaks even when revenue and cost are equal—when the demand curve (price) just equals the minimum point of the average-total-cost curve. §1.d
7. What is the firm’s supply curve in the short run?
· 7. The firm’s short-run supply curve is the portion of its marginal-cost curve that lies above the minimum point of the average-variable-cost curve. §1.e
8. What is the firm’s supply curve in the long run?
· 8. The firm produces at the point where marginal cost equals marginal revenue, as long as marginal revenue exceeds the minimum point of the average-total-cost curve. Thus, the firm’s long-run supply curve is the portion of its marginal-cost curve that lies above the minimum point of the average-total-cost curve. §1.e
9. What are the long-run equilibrium results of a perfectly competitive market?
· 9. In the long run, all firms operating in perfect competition will earn a normal profit by producing at the lowest possible cost, and all consumers will buy the goods and services they most want at a price equal to the marginal cost of producing the goods and services. §2.c
· 10. Producer surplus is the difference between what a firm would be willing to produce and sell a good for and the price the firm actually receives for the good. Consumer surplus is the difference between what an individual would be willing to pay for a good and what the individual actually has to pay. Total consumer and producer surpluses are at a maximum in a perfectly competitive market. §2.c.1