The point where marginal cost crosses average variable cost, below which a firm stops producing in the short run, is called the shutdown point.
Missing Word
shutdown
The shutdown point marks the lowest price at which revenue still covers variable costs. Below it, the firm loses less by closing and paying only its fixed costs.
Category: Shutdown Decisions
Question 2
When firms in a competitive industry earn positive economic profits, new firms join the industry, a process called entry.
Missing Word
entry
Entry is the arrival of new firms attracted by profits. It increases market supply and lowers the price until economic profit is zero.
Category: Long-Run Adjustment
Question 3
Firms that cannot cover their costs over the long run leave the industry, a process called exit.
Missing Word
exit
Exit is the departure of firms facing ongoing losses. It reduces market supply and raises the price until the remaining firms break even.
Category: Long-Run Adjustment
Question 4
On a graph of a perfectly competitive firm's revenue, total revenue is the area of a rectangle whose height is the going market rate and whose width is the quantity sold.
Missing Word
rectangle
Total revenue equals price times quantity, and multiplying a height by a width gives the area of a rectangle. Comparing that area with the rectangle for total cost, average cost times quantity, shows the firm's profit or loss on the graph.
Category: Profit and Loss
Question 5
A firm that shuts down in the short run produces nothing but must still pay its fixed costs, such as rent owed under a lease.
Missing Word
fixed
Fixed costs do not depend on output, so they remain even at zero production in the short run. This is why a firm compares its loss from operating with the loss equal to these costs.
Category: Shutdown Decisions
Question 6
When new firms are drawn into a profitable competitive industry, the market supply curve shifts to the right.
Missing Word
right
More firms means more output offered at every price, which is a rightward shift of market supply. The shift lowers the equilibrium price and raises the equilibrium quantity.
Category: Long-Run Adjustment
Question 7
When the value buyers place on the last unit produced equals the cost to society of making it, the market has achieved allocative efficiency.
Missing Word
allocative
Allocative efficiency means producing the quantity where price, which measures buyers' value, equals marginal cost. Producing more or less would make society worse off.
Category: Efficiency
Question 8
Producing output at the lowest possible average cost, with no waste of resources, is called productive efficiency.
Missing Word
productive
Productive efficiency means goods are made at the lowest cost per unit. In long-run perfect competition, entry and exit push price to the minimum of average cost, so firms produce this way.
Category: Efficiency
Question 9
Because buyers will purchase any amount a perfectly competitive firm offers at the going market rate, the firm faces a horizontal demand curve.
Missing Word
demand
The firm's demand curve is perfectly elastic at the market price. If the firm charged more, it would sell nothing, and it can sell all it wants at the going price.
Category: Price Takers
Question 10
When no firm has a reason to enter or leave a perfectly competitive industry, the industry is in long-run equilibrium.
Missing Word
equilibrium
Long-run equilibrium occurs when price equals the minimum of average total cost and economic profit is zero. With no profits to attract entry and no losses to force exit, the number of firms stays the same.
Category: Long-Run Equilibrium
Question 11
For a perfectly competitive firm, the marginal revenue from selling one more unit equals the market price.
Missing Word
price
A price taker sells every unit at the same market price, so each extra unit adds exactly that amount to total revenue. This is why the rule MR = MC becomes P = MC.
Category: Profit-Maximizing Output
Question 12
An industry in which growth raises the production costs of every firm, so that its long-run supply curve slopes upward, is called an increasing-cost industry.
Missing Word
increasing
In an increasing-cost industry, expansion bids up the prices of inputs the firms need, so each firm's cost curves shift up. A higher demand therefore leads to a higher long-run price, which makes the long-run supply curve slope upward.
Category: Long-Run Supply
Question 13
When an industry can grow without changing any firm's production costs, it is called a constant-cost industry, and its long-run supply curve is flat.
Missing Word
constant
In a constant-cost industry, new firms can enter without raising or lowering the costs of production for existing firms. After demand rises and entry occurs, price returns to the same minimum average cost, so the long-run supply curve is horizontal.
Category: Long-Run Supply
Question 14
Because a perfectly competitive firm earns the same amount on every unit, its total revenue curve is a straight line starting at the origin.
Missing Word
origin
Total revenue is price times quantity, which is zero at zero output and rises by the same amount with each unit. That makes it a straight line through the origin with a slope equal to the price.
Category: Profit and Loss
Question 15
When the going market rate for a product falls below average total cost, competitive firms suffer economic losses.
Missing Word
losses
If price is below average total cost, revenue does not cover all costs, so economic profit is negative. Firms may keep operating in the short run if price covers average variable cost, but they leave in the long run.
Category: Profit and Loss