Chapter 6, Part 2

• What defines a competitive market?

  A market with many buyers and sellers where firms sell identical products and can freely enter and exit the market.
• What is the goal of firms in a competitive market?

  To maximize profit by deciding how much output to produce, whether to shut down temporarily, or whether to enter/exit a market.
• What are the characteristics of perfect competition?

  Many buyers and sellers, identical products, free entry and exit, and perfect information.
• Why are firms in perfect competition called price takers?

  Because their individual output doesn't influence the market price.
• How is total revenue (TR) calculated?

  TR = Price (P) x Quantity (Q).
• How is average revenue (AR) calculated?

  AR = TR / Q = P.
• How is marginal revenue (MR) calculated?


  MR = ΔTR / ΔQ = P.
• What is the rule for profit maximization in perfect competition?

  Firms maximize profit by producing the quantity where MR = MC (Marginal Cost).
• What is the short-run production decision rule?

  If P > AVC (Average Variable Cost), firms produce in the short run; if P < AVC, firms shut down temporarily.
• What is the long-run production decision rule?

  Firms enter the market if P > ATC (Average Total Cost) and exit if P < ATC.
• What is the short-run supply curve for a firm?


  The portion of the MC curve above AVC.
• What is the long-run supply curve for a firm?


  The portion of the MC curve above ATC.
• How is the market supply curve determined?

  By the sum of individual firm supplies.
• What happens when new firms enter the market in the long run?

  Supply increases, prices decrease, and profits reach zero.
• What happens when firms exit the market in the long run?

  Supply decreases, prices increase, and losses are eliminated until profits reach zero.
• What is long-run equilibrium in a competitive market?

  Firms produce at the point where P = MC = ATC, making zero economic profit.
• What are the short-run effects of a demand increase?

  Prices and profits increase, leading existing firms to produce more.
• What are the long-run effects of a demand increase?

  New firms enter, increasing supply and reducing prices back to zero economic profit.
• How is profit calculated in a competitive market?

  Profit = TR - TC = (P - ATC) x Q.
• What is the supply curve in competitive markets?


  A firm's supply curve is its MC curve above AVC in the short run and above ATC in the long run.