Eco Revision
Perfect competition
Learning outcomes
You should be able to:
Describe the assumed characteristics of perfect competition: a large number of firms; a homogeneous product, freedom of entry and exit (no barriers to entry or exit); perfect information and perfect resource mobility (factors of production can move easily in and out of the market)
Explain, using a diagram, the shape of the perfectly competitive firm’s average revenue and marginal revenue curves, indicating that the assumptions of perfect competition imply that each firm is a price taker
Explain, using a diagram, that the perfectly competitive firm’s average revenue and marginal revenue curves are derived from market equilibrium from the industry
Explain, using diagrams, that it is possible for a perfectly competitive firm to make abnormal (economic) profits or economic losses in the short run based on the assumption that goal of the firm is to maximize profits.
Describe abnormal profit (economic profit ) as the case where total revenue exceeds economic cost.
Explain, using a diagram, why, in the long run, a perfectly competitive firm will make normal profits.
Explain the concept of normal profit as the amount of revenue needed to cover all economic costs of production, including explicit and implicit costs. (It is also explained as the amount of revenue needed to just keep the firm in business)
Explain, using a diagram, how a perfectly competitive firm will move from a short run to a long run equilibrium.
Distinguish between the shut-down price and the break-even price
Explain, using a diagram, when a loss-making firm would shut down in the short run
Explain, using a diagram, when a loss making firm would shut down and exit the firm in the long run.
Explain the meaning of the term ‘allocative efficiency’
Explain that the condition for allocative efficiency is P=MC
Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the
Learning outcomes
You should be able to:
Describe the assumed characteristics of perfect competition: a large number of firms; a homogeneous product, freedom of entry and exit (no barriers to entry or exit); perfect information and perfect resource mobility (factors of production can move easily in and out of the market)
Explain, using a diagram, the shape of the perfectly competitive firm’s average revenue and marginal revenue curves, indicating that the assumptions of perfect competition imply that each firm is a price taker
Explain, using a diagram, that the perfectly competitive firm’s average revenue and marginal revenue curves are derived from market equilibrium from the industry
Explain, using diagrams, that it is possible for a perfectly competitive firm to make abnormal (economic) profits or economic losses in the short run based on the assumption that goal of the firm is to maximize profits.
Describe abnormal profit (economic profit ) as the case where total revenue exceeds economic cost.
Explain, using a diagram, why, in the long run, a perfectly competitive firm will make normal profits.
Explain the concept of normal profit as the amount of revenue needed to cover all economic costs of production, including explicit and implicit costs. (It is also explained as the amount of revenue needed to just keep the firm in business)
Explain, using a diagram, how a perfectly competitive firm will move from a short run to a long run equilibrium.
Distinguish between the shut-down price and the break-even price
Explain, using a diagram, when a loss-making firm would shut down in the short run
Explain, using a diagram, when a loss making firm would shut down and exit the firm in the long run.
Explain the meaning of the term ‘allocative efficiency’
Explain that the condition for allocative efficiency is P=MC
Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the