More on Perfect Competition

Read Chapter 8, which provides an overview of the Perfect Competition model and a guide to the elements you need to know in order to understand the model. Be sure to read the sections following the introduction.

6. Key Terms


the long-run process of firms entering an industry in response to industry profits


the long-run process of firms reducing production and shutting down in response to industry losses

long-run equilibrium

where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC

marginal revenue

the additional revenue gained from selling one more unit

market structure

the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold

perfect competition

each firm faces many competitors that sell identical products

price taker

a firm in a perfectly competitive market that must take the prevailing market price as given

shutdown point

level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately