AP Micro perfect competition review

What defines perfect competition?

Market structure with many buyers and sellers, identical products, and no barriers to entry.

True or false: Firms in perfect competition are price takers.

True, because they cannot influence market price due to their small size relative to the market.

Difference between short-run and long-run in perfect competition?

Short-run: firms can earn supernormal profits. Long-run: firms earn normal profits due to entry/exit.

What happens to profit margins in the long run?

Profit margins reach zero as new firms enter the market, driving down prices.

Define marginal cost (MC).

The additional cost of producing one more unit of a good.

When does a firm in perfect competition maximize profit?

When marginal cost equals marginal revenue (MC = MR).

Fill in the blank: In the long run, firms in perfect competition earn ____ profits.

normal profits, as all economic profits are eroded by competition.

What is allocative efficiency?

Occurs when resources are distributed in a way that maximizes consumer satisfaction (P = MC).

True or false: Perfect competition leads to productive efficiency.

True, because firms produce at the lowest possible cost in the long run.

What is a characteristic of perfect competition?

Homogeneous products: all products are identical, creating no brand loyalty.

How do firms respond to a market price increase?

Firms increase output to maximize profit until MC = new market price.

Which is NOT a characteristic of perfect competition?

A few large firms dominate the market; that describes oligopoly.

Define consumer surplus.

The difference between what consumers are willing to pay and what they actually pay.

In perfect competition, what role does advertising play?

Minimal, since products are identical and firms are price takers.

What happens if a firm incurs loss in short run?

It may continue operating if it can cover variable costs; otherwise, it may exit.