Microeconomics Unit 2 – Perfect Competition

Key Concepts and Questions:

* Economic costs are the fundamental force in determining supply.

* What is the relationship between diminishing returns and marginal costs?

* What is the relationship between total, average and marginal costs in the short run? In the long run?

* Economies of scale and increasing returns are not the same.

* All firms will strive to maximize profits, or to minimize their losses.

* The best operating output for any firm comes when MR³MC.

* How do perfectly competitive firms determine their equilibrium price and output in the short run? In the long run?

* What is the relationship between an individual perfectly competitive firm and a perfectly competitive market?

Terms and Topics:

Ø Fixed factor of production

Ø Market period

Ø Variable factor of production

Ø Profit

Ø Firm

- Normal plant

- Economic (pure) industry

Ø Accounting explicit cost

Ø Implicit cost

Ø Marginal product

Ø Law of diminishing returns

Ø Average product

Ø Total product

Ø Increasing returns

Ø Negative returns

Ø Point of diminishing returns

Ø Decreasing returns

Ø Capital/labor ratio (k/l)

Ø Specialization

Ø Curve relationships

Ø What can cause MC, AVC, or ATC to shift?

Ø Total revenue

Ø Marginal revenue

Ø Marginal cost

Ø Fixed costs

Ø Variable costs

Ø Average fixed cost

Ø Average variable cost

Ø Total cost

Ø Average total cost

Ø Short run

Ø Minimum efficient scale (MES)

Ø Long run

Ø Economies of scale

Ø Constant returns to scale

Ø Diseconomies of scale

Ø Long run ATC

Ø Optimum size of a firm

Ø Overhead/sunk costs

Ø Profit maximization MR=MC

Ø Minimizing costs

Ø Exiting a market

Ø Short run shut down

Ø MC = supply curve (when > AVC)

Ø Break even points

Ø How can firms increase profits?

Ø Long run equilibrium

Ø Economic efficiency of perfect competition

Ø Characteristics of a perfect competition

Ø Price taker

Ø Why enter or exit?

Ø Graphical Analysis for a Firm in a Perfectly Competitive Market

Ø Profit Maximization

Ø Minimizing Losses

Ø Supply Curve

-Operate Single Firm Demand

-Shut down

Ø Long Run Equilibrium

Ø Single Firm and industry

Ø MC and Diminishing Returns

Ø Cost shifts

*Know the relationships between ATC, AVC and MC/ Be able to draw them on a graph.