How does easy entry/exit affect long-run profits?
Easy entry eliminates economic profits; easy exit eliminates economic losses, leading to normal profit.
Why are perfectly competitive firms 'price takers'?
Because there are many small firms and identical products, no single firm can influence the market price.
How does increased demand impact short-run profits?
Increased demand leads to higher market prices, resulting in short-run economic profits for firms.
What happens when firms make short-run losses?
Some firms will exit the market, decreasing supply and increasing the market price.
How does perfect information affect efficiency?
It allows resources to be allocated efficiently, leading to allocative and productive efficiency.
What does P = MC signify?
It signifies allocative efficiency, meaning resources are allocated to their most valued use.
How do identical products impact non-price competition?
With identical products, there is no need for non-price competition like advertising.
How does free entry affect the supply curve?
Free entry shifts the market supply curve to the right, decreasing the equilibrium price.
What happens to the firm's demand curve when market demand increases?
The firm's demand curve shifts upward, reflecting the new market price.
How does a firm decide to shut down in the short run?
If the price is below the average variable cost (AVC), the firm should shut down to minimize losses.
What does the horizontal demand curve indicate?
The firm is a price taker and can sell any quantity at the market price.
What does the intersection of MC and MR indicate?
The profit-maximizing quantity for the firm.
How is short-run profit shown on a graph?
Price is above the ATC at the profit-maximizing quantity (MR=MC).
How is short-run loss shown on a graph?
Price is below the ATC but above the AVC at the profit-maximizing quantity (MR=MC).
How is the shutdown point shown on a graph?
Price is below both ATC and AVC at the profit-maximizing quantity (MR=MC).
What does the tangency of P and min ATC signify?
Long-run equilibrium, zero economic profit, and productive efficiency.
What does a shift in the market supply curve indicate?
It indicates a change in the number of firms or production costs in the market.
How does entry of new firms affect the firm's graph?
The firm's demand curve (price line) shifts down as market price decreases.
How does exit of firms affect the firm's graph?
The firm's demand curve (price line) shifts up as market price increases.
What does the side-by-side graph show?
It shows the relationship between the market and the individual firm, illustrating how the market price affects the firm's decisions.
How does a subsidy affect the market?
It decreases the cost of production, increases supply, and lowers the market price.
How does a tax affect the market?
It increases the cost of production, decreases supply, and raises the market price.
How does price control affect the market?
It creates shortages if set below the equilibrium price or surpluses if set above.
What is the impact of regulations on production costs?
Regulations typically increase production costs, leading to decreased supply and higher prices.
What is the effect of removing barriers to entry?
More firms enter the market, increasing supply and decreasing the market price.
How does a price ceiling affect firms?
If binding, it reduces revenue and can lead to losses, potentially causing firms to exit the market.
How does a price floor affect firms?
If binding, it leads to surpluses, meaning firms may not be able to sell all their product.
How does a tariff affect domestic firms?
It increases the price of imported goods, making domestic firms more competitive.
How do consumer protection laws affect firms?
They increase costs due to compliance but can also enhance reputation and demand.
How does antitrust policy affect firms?
It prevents monopolies and encourages competition, potentially limiting the size and market power of individual firms.
