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Economics 202 ch 21
Principles of Economics ch 21
| Question | Answer |
|---|---|
| Market Power | The ability of a seller or a buyer to affect market price. |
| Perfect Competition | Many sellers of identical products. |
| The key characteristic of perfect competition is: | A lack of market power, because each competitor has no ability to affect market price. |
| The two primary reasons that a perfect competitor has no market power are: | There are many sellers in a perfect competitive market. All firms in a perfect competitive market sell an identical product. |
| Since a perfect competitor is unable to affect the market price for its product, a perfect competitor will face a demand curve for its product that is: | Horizontal (perfectly elastic) at the market price. |
| Profit-Maximization Rule | Produce the quantity of output where marginal revenue equals marginal cost. |
| Marginal Revenue | The change in total revenue from selling one additional unit of output. |
| Total Revenue = | Price x Quantity |
| A supply curve indicates: | The quantity supplied at different prices. |
| If the price falls below AVC: | The perfect competitor will shut down. |
| The supply curve for a perfect competitor is the portion of: | The firm's marginal cost that lies above the shutdown point. |
| If economic profits are available in a perfectly competitive market, : | New firms will be attracted to the market. |
| As new firms enter the market, : | The market supply increases and the market price decreases. |
| As long as the market price is above ATC: | Economic profits will be earned, new firms will continue to enter the market, and the market price will continue to decrease. |
| If economic losses are occurring in a perfectly competitive market: | Existing firms will be motivated to leave the market. |
| As existing firms exit the market: | The market supply decreases and the market price increases. |
| The optimal (ideal, most efficient) level of an activity occurs where: | The marginal benefit and the marginal cost of the activity are equal. |
| Economic Efficiency Rule | Produce the quantity to output where marginal social benefits equals marginal social cost. |
| Marginal Social Benefit (MSB) | The value (benefit) to society of the marginal unit of output. |
| Assuming no external benefits, marginal social benefit is: | The same as marginal private benefit and is measured by market price. |
| Marginal Social Cost (MSC) | The cost to society of producing the marginal unit of output. |
| If there is an external cost, marginal social cost will be: | Different than marginal private cost. |
| If there are no externalities, the ideal (economically efficient) quantity of output occurs where: | Price equals marginal costs. |
| Perfect competition is the ideal ( most efficient) market structure because: | It results in the quantity of output where price equals marginal cost and thus (assuming no externalities) where marginal social benefit equals marginal social cost. |
| By a happy coincidence, the profit-maximizing quantity of output is also: | The economically efficient quantity of output (where price equals marginal cost and thus where MSB and MSC). |
| In a perfectly competitive market, production and distribution decisions can be made by: | Individuals, not by central authority, thus maximizing individual freedom. |
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dengler
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