AP Microeconomics Flashcards: Perfect Competition
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026
Review key ideas with interactive flashcards. This set includes 24 cards to help you master important concepts.
What determines the long-run price in a perfectly competitive industry?
Long-run prices depend on the portion of the long-run cost curves on which firms operate (i.e., whether it is a constant, increasing, or decreasing cost industry).
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What determines the long-run price in a perfectly competitive industry?
Long-run prices depend on the portion of the long-run cost curves on which firms operate (i.e., whether it is a constant, increasing, or decreasing cost industry).
What is the level of economic profit for a firm in a long-run perfectly competitive equilibrium?
In a long-run perfectly competitive equilibrium, firms earn zero economic profit.
Can a perfectly competitive firm earn a profit or a loss in the short run?
Yes, in a short-run competitive equilibrium, price can be above or below its long-run level, resulting in economic profits or losses.
What are the key characteristics of a perfectly competitive market?
Firms in perfectly competitive markets face no barriers to entry and have no market power.
Why is the demand curve for an individual perfectly competitive firm perfectly elastic (horizontal)?
It is perfectly elastic because the firm can sell all of its output at a constant price determined by the market and has no market power to change it.
What two types of efficiency are achieved in a long-run perfectly competitive equilibrium?
A perfectly competitive market in long-run equilibrium is both allocatively and productively efficient.
What happens in the long run if firms are incurring economic losses in the short run?
Short-run losses motivate the exit of firms from the market, which moves prices and quantities toward a long-run equilibrium.
A perfectly competitive firm is producing at a quantity where P = MC = minimum ATC. What can be concluded?
The firm is in a long-run equilibrium, earning zero economic profit and achieving both productive and allocative efficiency.
What condition must be met for a competitive market equilibrium to be allocatively efficient?
For allocative efficiency, the price of the product must equal both the private marginal benefit and the private marginal cost of the last unit.
In perfect competition, what is the relationship between price and marginal revenue?
For a perfectly competitive firm, marginal revenue is equal to the market price because the firm can sell all its output at that constant price.
Why is a perfectly competitive market considered efficient?
It is efficient because price equals marginal cost, and firms produce at their efficient scale in the long run, achieving both allocative and productive efficiency.
What does it mean for a firm to be a 'price taker'?
A price taker is a firm that can sell all its output at a constant price determined by the market and has no power to influence that price.
What are the three types of long-run cost industries?
Firms may be in a constant cost, increasing cost, or decreasing cost industry.
How is economic profit or loss calculated for a perfectly competitive firm?
Economic profit or loss is calculated using data from a graph or table, typically by finding the difference between total revenue (Price x Quantity) and total cost (ATC x Quantity).
What happens in the long run if firms are earning economic profits in the short run?
Short-run profits motivate the entry of new firms, which moves prices and quantities toward a long-run equilibrium with zero economic profit.
How is the market price for a perfectly competitive firm determined?
The market price is determined by the interaction of market supply and market demand; the individual firm must accept this price.
How does a firm in a perfectly competitive market decide its profit-maximizing output?
Firms select output to maximize profit by producing the level of output where the marginal cost equals marginal revenue (at the price).
What is the relationship between price, marginal cost, and average total cost in a long-run equilibrium?
In a long-run perfectly competitive equilibrium, price equals marginal cost and the minimum average total cost (P = MC = min ATC).
If the market price is below a firm's minimum average total cost but above its minimum average variable cost, what will the firm do in the short run?
The firm will continue to produce in the short run, incurring a loss, because the price covers all variable costs and some fixed costs.
What is productive efficiency?
Productive efficiency implies that all operating firms produce at their efficient scale, which is the level of output at the minimum average total cost.
Define allocative efficiency.
Allocative efficiency is achieved when the price of a product equals both the private marginal benefit of the last unit consumed and the private marginal cost to produce the last unit.
A firm is producing where P = $10, MC = $8, and ATC = $7. To maximize profit, should this firm increase, decrease, or maintain its output?
The firm should increase its output because its marginal revenue ($10 price) is greater than its marginal cost ($8).
What is meant by 'efficient scale' of production?
The efficient scale is the level of production where a firm's long-run average total cost is at its minimum.
What information do prices communicate in perfectly competitive markets?
Prices communicate the magnitude of others' marginal costs of production and marginal benefits of consumption, and provide incentives to act on that information.