Diagrammatic Analysis of Perfect Competition in the Short Run and Long Run

The video tutorial explains the market structure of perfect competition, where firms are price takers selling homogeneous products with perfect information. It covers how to draw perfect competition graphs, showing market and firm interactions. The tutorial discusses long-run equilibrium, where firms make normal profits, and explores scenarios like positive and negative demand shocks and cost changes, illustrating their effects on market equilibrium and firm profits. The video concludes with a recap of key concepts and tips for drawing diagrams.

In a perfectly competitive market, why are firms considered price takers?

• They have significant market power.

• There are many small firms with no influence on market price.

• They sell unique products.

• They can set their own prices.

What is the shape of the demand curve faced by a firm in perfect competition?

• Vertical

• Horizontal

• Upward sloping

• Downward sloping

In perfect competition, where does a firm maximize its profit?

• Where average cost equals average revenue

• Where marginal cost equals marginal revenue

• Where marginal cost is minimized

• Where total cost equals total revenue

What happens to the market equilibrium price when there is a positive demand shock?

• It decreases

• It fluctuates randomly

• It increases

• It remains unchanged

How do firms respond to supernormal profits in the long run in a perfectly competitive market?

• They increase prices

• Existing firms exit the market

• New firms enter the market

• They decrease production

What is the long-run outcome for firms in a perfectly competitive market?

• Firms have fluctuating profits

• Firms make normal profits

• Firms incur losses

• Firms make supernormal profits

What effect does an increase in costs have on a firm's profit in the short run?

• No effect on profit

• Decreases profit

• Increases profit

• Leads to supernormal profit

How does a firm in perfect competition react to an economic loss in the long run?

• It continues to operate at a loss

• It raises prices

• It exits the market

• It increases production

What happens to the supply curve when firms exit the market due to economic losses?

• It remains unchanged

• It shifts outward

• It becomes vertical

• It shifts inward

What is the relationship between average revenue and average cost in the long run for a firm in perfect competition?

• Average revenue is greater than average cost

• Average revenue is less than average cost

• Average revenue equals average cost

• Average revenue fluctuates more than average cost