Perfect Competition - AP Microeconomics

1. Identify the relationship between price and marginal cost in long-run equilibrium.

   $P = MC$. Resources allocated efficiently when price equals marginal cost.

2. State the profit-maximizing condition in perfect competition.

   $MR = MC$. Maximizes profit where additional revenue equals additional cost.

3. Identify the effect on market price when firms exit an industry.

   Market price increases. Fewer firms producing reduces market supply, raising price.

4. What is the formula for calculating average total cost?

   $ATC = \frac{TC}{Q}$. Average cost calculated by dividing total cost by quantity.

5. State the effect on price when market demand increases.

   Price increases. Higher demand shifts demand curve right, raising equilibrium price.

6. Calculate average fixed cost if $FC = 100$ and $Q = 20$.

   $AFC = 5$. Average fixed cost equals $\frac{FC}{Q} = \frac{100}{20}$.

7. Identify the market adjustment if $P < ATC$.

   Firms exit the market. Losses cause firms to leave, reducing market supply.

8. Identify the condition for normal profit in perfect competition.

   $P = ATC$. Firm earns exactly normal profit when price equals average total cost.

9. What is the firm's supply curve in perfect competition?

   MC curve above AVC. Firm only produces where it can cover variable costs.

10. What is the formula for calculating economic profit?

    Economic Profit = $TR - TC$. Profit equals total revenue minus total costs.

11. What is the effect on firm supply if technological advancements occur?

    Firm supply increases. Lower production costs shift supply curve right.

12. Identify the relationship between average revenue and price.

    $AR = P$. In perfect competition, average revenue equals market price.

13. Identify the outcome when firms in perfect competition earn zero economic profit.

    Long-run equilibrium. Firms earn normal profit when economic profit equals zero.

14. Choose the characteristic of perfect competition affecting entry and exit.

    Free entry and exit. No barriers prevent firms from entering or leaving the market.

15. What is the long-run effect of economic profits in the industry?

    Entry of new firms. Profits attract new competitors, increasing market supply.

16. What is a characteristic of a perfectly competitive market?

    Many buyers and sellers. Ensures no single buyer or seller can influence market price.

17. What determines the firm's output decision in the short run?

    MC and MR relationship. Firms produce where marginal cost equals marginal revenue.

18. What is the profit outcome if $TR = TC$?

    Zero economic profit. Total revenue exactly equals total costs.

19. State the condition when firms in perfect competition achieve allocative efficiency.

    $P = MC$. Resources allocated efficiently when price equals marginal cost.

20. What is the formula for total revenue in perfect competition?

    $TR = P \times Q$. Revenue equals price times quantity sold.

21. What does the supply curve for a competitive firm correspond to?

    MC above AVC. Firm supplies where marginal cost exceeds average variable cost.

22. Identify the result if $P < ATC$ and $P > AVC$.

    Operate at a loss. Firm covers variable costs but not all fixed costs.

23. Find the average revenue when total revenue is $500$ and output is $50$ units.

    $AR = 10$. Average revenue calculated as $\frac{TR}{Q} = \frac{500}{50}$.

24. What happens to market supply if new firms enter the market?

    Market supply increases. More firms producing increases total market supply.

25. What happens to profits if $P > ATC$ in perfect competition?

    Economic profit. Firm earns above-normal profits when price exceeds average total cost.

26. Identify the impact of perfect competition on consumer surplus.

    Maximized. Perfect competition achieves maximum possible consumer welfare.

27. Which condition indicates a firm is a price taker?

    Market sets price; firm accepts it. Firm has no control over price, only quantity decisions.

28. Calculate marginal cost if $TC$ rises from $100$ to $150$ with $10$ units.

    $MC = 5$. Marginal cost equals $\frac{\Delta TC}{\Delta Q} = \frac{50}{10}$.

29. Determine the result if $P < AVC$ in the short run.

    Shutdown. Firm minimizes losses by ceasing production when price is too low.

30. What ensures allocative efficiency in perfect competition?

    $P = MC$. Resources allocated optimally when price equals marginal cost.

31. What is the shape of the demand curve for a perfectly competitive firm?

    Perfectly elastic. Firm can sell any quantity at market price.

32. What ensures productive efficiency in perfect competition?

    Producing at minimum ATC. Firms produce at lowest possible average total cost.

33. What is the condition for shutdown in the short run?

    $P < AVC$. Firm cannot cover variable costs, so it should stop production.

34. State the effect of an increase in production costs on supply.

    Supply decreases. Higher costs shift supply curve left, reducing quantity supplied.

35. Determine the result if $P = AVC$ in the short run.

    Indifference between operating and shutting down. Firm is exactly at the shutdown point.

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