Micro

• What is the definition of perfect competition?

  Perfect competition is a market structure characterized by many small firms selling homogeneous products.
• What are the key characteristics of perfect competition?


  Many small firms, homogeneous products, perfect information, no barriers to entry or exit, and firms are price takers.
• In perfect competition, what is the role of firms regarding prices?

  Firms are price takers.
• What happens to firms' profits in the long run in a perfectly competitive market?


  Firms make normal profits in the long run.
• How is the market price determined in perfect competition?


  The market price is determined by the intersection of market supply and demand curves.
• What is the effect of firms exiting a perfectly competitive industry?


  Firms exiting reduce supply, shift the supply curve to the left, and tend to increase prices.
• What is a likely short-term effect on prices when firms exit a perfectly competitive market?


  Prices tend to rise due to reduced supply.
• What is the relationship between average revenue and marginal revenue in perfect competition?


  In perfect competition, average revenue equals marginal revenue.
• What are the likely outcomes of exit from the industry by loss-making producers in perfect competition?


  • Firms remaining will not cut prices
  • Firms will not keep prices unchanged
  • Firms will operate where average revenue equals marginal revenue
  • Firms will make normal profits in the long run
  • Demand will not expand as prices rise
• What is the expected impact on demand when prices rise due to reduced supply in a perfectly competitive market?


  Demand for the commodity will not expand as prices rise.
• Which statement about firms remaining in a perfectly competitive market is true?


  Firms remaining in the market will make normal profits in the long run.
• What are the effects of firms exiting a perfectly competitive industry?


  • Reduced supply
  • Shift in supply curve to the left
  • Price increase
  • Short-term profit opportunity for remaining firms
  • Long-term market adjustment back to equilibrium
• What happens to prices and profits in the long run after firms exit a perfectly competitive market?


  In the long run, the market adjusts back to equilibrium where firms make normal profits.
• If many apple farmers quit, what is the expected impact on apple prices?


  Apple prices are likely to rise in the short term.
• What are economies of scale?


  Cost advantages obtained due to increased scale of operation
• How do economies of scale affect production costs?


  They generally decrease the cost per unit of output as production increases
• What is a practical example of economies of scale?


  A bakery producing 1000 loaves of bread at a lower per-unit cost than 100 loaves
• What are the key points of economies of scale?


  • Cost reduction as production increases
  • Results from specialization and division of labor
  • Allows for bulk buying of materials
  • Enables use of specialized machinery
• What does the long-run average cost (LRAC) curve represent?


  The lowest cost per unit that a firm can achieve for any given level of output
• What is the shape of the LRAC curve in many industries?


  1. shaped
• What does the U-shaped LRAC curve indicate about production levels?


  It shows economies of scale, constant returns to scale, and diseconomies of scale
• How does the LRAC curve help firms?


  It helps firms determine their optimal production level
• What is minimum efficient scale (MES)?


  The lowest point on the LRAC curve where a firm can minimize its costs
• What does MES represent in terms of output?


  It is the smallest level of output at which LRAC is minimized
• What happens to costs per unit after reaching the MES?


  Costs per unit remain constant or may increase
• How does MES help determine a firm's size in an industry?


  It helps determine the optimal size of a firm in an industry
• What are the implications of minimum efficient scale (MES) for businesses?


  1. Market structure: High MES leads to concentration (oligopolies or monopolies)
  2. Barriers to entry: High MES can deter new firms
  3. Competitive strategy: Firms aim to reach or exceed MES for cost advantages
  4. Industry consolidation: Mergers may occur to achieve economies of scale
  5. Pricing decisions: Firms at MES have more pricing flexibility
• What market structure is likely to emerge when MES is large compared to market demand?


  Oligopoly or monopoly
• What industries typically have a large MES?


  Automobile manufacturing, steel production, semiconductor fabrication
• What factors affect minimum efficient scale (MES)?


  Technology, capital intensity, labor specialization, regulatory environment
• Why does the technology startup likely have a large MES?


  Due to significant investment in technology and specialized labor
• How does MES vary across different industries?


  It varies significantly, with some industries having large MES and others having small MES
• What are examples of industries with small MES?


  • Local restaurants
  • Hairdressing salons
  • Small-scale agriculture
• What are examples of industries with medium MES?


  • Retail chains
  • Food processing
• What are examples of industries with large MES?


  • Automobile manufacturing
  • Steel production
  • Semiconductor fabrication
• 3.1 business growth