MICROECONOMICS Chap 12 – Flashcards
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What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
answer
A firm's marginal cost curve is equal to its supply curve for prices above Average Variable Cost
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When should you shut down in a perfectly competitive market?
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When AVC is greater than prices
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When should you continue to operate?
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Whenever you are covering your Variable Cost
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Why does the supply curve for a perfectly competitive firm in the short run ONLY exist where the marginal cost curve is AT or ABOVE AVC?
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Because in perfect competition a firm would shut down whenever the marginal cost/supply curve is below AVC (thus there being no supply from that firm)
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When are firms likely to enter an industry & when are they likely to exit?
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Economic profits will attract firms and economic losses will drive firms out
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Why does the entry of firms into an industry decrease the economic profits of the existing firms?
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Because when new firms enter into an industry total supply in the industry increases leading to a reduction in price and reduction in economic profit of the existing firms
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Why does the exit of firms from an industry increase the economic profits of the existing firms?
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Because when firms exit from an industry total industry supply decreases which increases industry price and economic profit of the existing firms
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In perfect competition, long-run equilibrium occurs when the economic profit is?
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ZERO
