Unit 6: Perfect Competition
A market with so many identical sellers that none of them can move the price, and what that forces every firm to do.
7 topics · 24 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
What Makes a Market Perfectly Competitive
- How it worksHow do many small sellers, an identical product, and free entry and exit define a perfectly competitive market?
- How it worksHow does full information about prices and products keep every seller in a competitive market honest?
- Common mistakeWhy isn't a market with a hundred sellers automatically a perfectly competitive one?
Your turn1 of 2
One farmer sells 154 bushels out of a market total of 35960 bushels. What percent of the market does this farmer supply?The Price-Taker's Flat Demand Curve
- How it worksHow does a firm so small relative to the market end up unable to affect price no matter how much it sells?
- Worked exampleFind the revenue a wheat farmer earns selling 500 additional bushels at the going market price of 6 dollars a bushel.
- Common mistakeWhy doesn't a competitive firm's flat demand curve mean the entire market's demand curve is flat too?
Your turn1 of 2
Find the revenue a wheat farmer earns selling 587 additional bushels at the going market price of 8 dollars a bushel.Profit Maximization Where Marginal Revenue Equals Marginal Cost
- How it worksHow does a firm find its profit-maximizing output by producing until marginal revenue equals marginal cost?
- Worked exampleFind the profit-maximizing quantity when price is 10 dollars and marginal cost hits 10 dollars at 40 units of output.
- Common mistakeWhy doesn't the firm produce at the quantity where profit per unit is the highest?
- Going furtherWhat happens to the profit-maximizing quantity when the market price rises?
Your turn1 of 2
Find the profit-maximizing quantity when price is 16 dollars and marginal cost is MC = 0.46 times Q dollars.The Shutdown Decision in the Short Run
- How it worksHow does comparing price to average variable cost tell a firm whether to keep operating or shut down in the short run?
- Worked exampleFind whether a firm should shut down when price is 8 dollars and average variable cost is 9 dollars at every output level.
- Common mistakeWhy shouldn't a firm let the rent it already paid on its building affect its shutdown decision?
- Going furtherWhat happens to the shutdown decision once price falls below average variable cost?
Your turn1 of 2
At a price of 12 dollars, with average variable cost of 14 dollars, by how many dollars per unit does price exceed average variable cost?The Firm's Short-Run Supply Curve
- How it worksHow does the portion of the marginal cost curve above the shutdown point become the firm's short-run supply curve?
- Worked exampleFind the quantity a firm supplies at a price of 12 dollars when marginal cost equals 12 dollars at 60 units.
- Ties togetherHow does adding up every firm's short-run supply curve build the market supply curve?
Your turn1 of 2
Find the quantity a firm supplies at a price of 20 dollars when marginal cost is MC = 0.395 times Q.Entry, Exit, and the Path to Long-Run Equilibrium
- How it worksHow does positive economic profit draw new firms into a market, shifting market supply to the right?
- How it worksHow do sustained losses push existing firms to exit a market, shifting market supply to the left?
- Going furtherWhat happens to market price and firm profit once entry and exit finally stop?
Your turn1 of 2
Coffee shops in a competitive market are currently earning positive economic profit. What happens to the market over time as a result?Long-Run Equilibrium and Zero Economic Profit
- How it worksHow does entry driving price down to the minimum of average total cost pin down long-run equilibrium?
- How it worksHow does zero economic profit still leave room for a normal accounting profit inside a firm's costs?
- Common mistakeWhy doesn't zero economic profit mean a firm is failing or about to close?
- Ties togetherHow does this long-run zero-profit outcome connect back to why firms kept entering the market in the first place?
Your turn1 of 2
A firm earns 128749 dollars in revenue with 72450 dollars in explicit costs, and 37967 dollars in implicit opportunity costs from the owner's forgone salary. What is the firm's economic profit?