A market in economics refers to
A A physical place where goods are sold
B A set of buyers only
C A system where buyers and sellers interact to determine price
D A government-controlled pricing system
In economics, a market is not necessarily a place; it is any arrangement enabling buyers and sellers to interact and determine price and quantity.
Perfect competition is best described as a market with
A One seller and many buyers
B Few sellers producing differentiated products
C Many buyers and sellers with a homogeneous product
D Many sellers selling different brands
Perfect competition has a large number of buyers and sellers and a homogeneous product, so no single firm can influence the market price.
A perfectly competitive firm is a price taker because
A It sells unique products
B It has high advertising power
C The market determines price through industry forces
D It faces a downward sloping demand curve
With many firms and homogeneous product, the market price is set by demand and supply; an individual firm must accept it.
The demand curve faced by a firm under perfect competition is
A Downward sloping
B Upward sloping
C Horizontal at the market price
D Vertical at the market output
A competitive firm can sell any quantity at the given market price, making its demand (AR) curve perfectly elastic.
Under perfect competition, average revenue (AR) is
A Greater than MR
B Less than MR
C Equal to MR
D Unrelated to MR
In perfect competition, price is constant for each unit, so AR = MR = Price.
Which of the following is NOT a feature of perfect competition?
A Homogeneous product
B Free entry and exit
C Perfect knowledge
D Product differentiation
Product differentiation is a feature of monopolistic competition, not perfect competition.
In perfect competition, firms earn only normal profit in the long run because
A Demand becomes zero
B Government fixes price
C Free entry and exit eliminate abnormal profits
D Firms collude to keep prices low
Supernormal profits attract new firms; increased supply lowers price until only normal profit remains.
Price determination in perfect competition is done by
A A single firm
B Buyers alone
C Industry demand and supply
D Government authority
The intersection of market demand and market supply determines equilibrium price and quantity.
The equilibrium price in a competitive market is the price at which
A Demand exceeds supply
B Supply exceeds demand
C Quantity demanded equals quantity supplied
D Marginal cost equals zero
Market equilibrium occurs where demand equals supply, leaving no tendency for price to change.
If market price is above equilibrium price, then
A Excess demand occurs
B Excess supply occurs
C Price will rise further
D Supply curve shifts left
Price above equilibrium causes surplus (excess supply), which pushes price down toward equilibrium.
If market price is below equilibrium price, then
A Excess supply occurs
B Excess demand occurs
C Price will fall further
D Demand curve shifts left
Price below equilibrium creates shortage (excess demand), pushing price upward.
Under perfect competition, a firm’s supply curve in short run is
A Its AVC curve
B Its MC curve above AVC
C Its AC curve
D Its MR curve
A firm supplies output where price ≥ AVC; therefore MC curve above AVC represents its supply decision.
A firm in perfect competition will shut down in the short run when
A Price < AC
B Price < AVC
C Price = MC
D MR is positive
If price cannot cover AVC, the firm cannot meet variable costs and should shut down to minimize losses.
In long run equilibrium under perfect competition, firms operate where
A P > LAC
B P < LAC
C P = minimum LAC
D P = minimum AVC
Long-run equilibrium implies P = minimum LAC and firms earn normal profit with optimal scale.
Under perfect competition, the industry supply curve is obtained by
A Vertical summation of firm supplies
B Horizontal summation of firm supplies
C Average of all supply curves
D Difference between supply and demand
Market supply is the horizontal sum of quantities supplied by all firms at each price.
Which condition represents profit maximization for a competitive firm?
A MR > MC
B MR < MC
C MR = MC
D AR = 0
Profit is maximized where MR = MC, provided MC cuts MR from below (stability condition).
A competitive firm can earn supernormal profit in the short run when
A P < AVC
B P = AC
C P > AC
D MR = 0
If price exceeds average cost, the firm earns more than normal profit (supernormal profit) in short run.
A competitive firm incurs loss in short run when
A P > AC
B P < AC but P ≥ AVC
C P > AVC but P = AC
D P = MR and MR = 0
If price is below AC but still above AVC, the firm covers variable costs but not total costs, so it continues with losses.
“Perfect knowledge” in perfect competition implies
A Only sellers know prices
B Only buyers know quality
C Both buyers and sellers know prices and market conditions
D No one knows anything about the market
Perfect information prevents price discrimination and ensures a single prevailing market price.
In perfect competition, identical products imply
A Firms can charge different prices
B Consumers have strong brand loyalty
C No preference among sellers except price
D Demand curve slopes downward for firm
Homogeneous product means buyers choose based on price; a single firm cannot raise price without losing all customers.
A firm in perfect competition faces a perfectly elastic demand because
A Supply is fixed
B Many substitutes exist in the same market
C It produces a unique product
D It has monopoly power
Many sellers offer identical products, so buyers can switch instantly if one firm charges higher price.
Which is a necessary condition for perfect competition?
A High transport cost
B Barriers to entry
C Large number of firms
D Heavy advertising
Many firms ensure no single firm controls price and the market remains competitive.
The short-run equilibrium output of a competitive firm is where
A P = AC
B P = MC and P ≥ AVC
C P = AVC
D MC = minimum AC only
Firm chooses output where P (= MR) equals MC, subject to shutdown condition P ≥ AVC.
When new firms enter a competitive industry, market supply
A Shifts left
B Shifts right
C Becomes vertical
D Becomes perfectly inelastic
Entry increases number of suppliers, raising supply at each price, shifting supply curve rightward.
When firms exit a competitive industry due to losses, market supply
A Shifts right
B Shifts left
C Becomes horizontal
D Becomes zero always
Exit reduces supply, shifting supply curve left, raising price toward normal profit.
Under perfect competition, long-run abnormal profits are eliminated mainly because
A Consumers stop buying
B Firms merge into monopoly
C Free entry and exit change market supply
D Firms keep MR above AR
Entry increases supply and reduces price; exit decreases supply and raises price, moving industry to normal profit.
Allocative efficiency in perfect competition occurs when
A P = AC
B P = MC
C MR = AR
D TC = TR
Allocative efficiency means price equals marginal cost, indicating resources are allocated where society values the last unit equal to its cost.
Productive efficiency in perfect competition occurs in long run when
A Firms produce at minimum AC
B Firms produce at maximum TC
C MR is negative
D Demand is perfectly inelastic
Productive efficiency means producing at minimum average cost, achieved at long-run equilibrium.
If demand increases in a competitive market, equilibrium price will
A Fall and quantity fall
B Rise and quantity rise
C Rise and quantity fall
D Remain unchanged
Higher demand shifts demand curve right, raising both equilibrium price and equilibrium quantity.
If supply increases in a competitive market, equilibrium price will
A Rise and quantity rise
B Rise and quantity fall
C Fall and quantity rise
D Fall and quantity fall
Rightward shift of supply reduces price and increases equilibrium quantity.
In perfect competition, firms are identical in the sense that
A All have same cost curves always
B All sell same product and have equal access to technology
C All earn supernormal profits permanently
D All face downward sloping demand
Homogeneous product and equal access to technology/inputs promote uniform competitive conditions.
The industry is in long-run equilibrium under perfect competition when
A Firms earn losses
B Firms earn supernormal profits
C Firms earn normal profits and no entry/exit occurs
D MR is greater than MC
Long-run equilibrium requires zero abnormal profit, ensuring no incentive to enter or exit.
A market form is classified mainly on the basis of
A National income
B Number of firms and nature of product
C Weather and climate
D Government expenditure
Market structure depends on number of sellers/buyers, product differentiation, and entry barriers.
If a single firm supplies the entire market output, the market form is
A Perfect competition
B Monopolistic competition
C Monopoly
D Oligopoly
Monopoly exists when one seller controls the whole supply of a product with no close substitutes.
Which market structure has “many sellers” but differentiated products?
A Monopoly
B Oligopoly
C Monopolistic competition
D Perfect competition
Monopolistic competition has many firms selling similar but differentiated products.
Oligopoly is a market with
A One seller
B Two sellers only
C Few dominant sellers
D Many sellers with identical products
Oligopoly consists of a small number of large firms whose decisions are interdependent.
A key feature that distinguishes oligopoly is
A Perfect mobility of factors
B Interdependence among firms
C Zero entry barriers
D Homogeneous product always
Firms in oligopoly consider rivals’ reactions while making price/output decisions.
In perfect competition, individual firm’s output is
A A large share of market output
B A negligible share of market output
C Equal to industry output
D Always fixed by government
Each firm is small relative to the market, so it cannot influence price.
Under perfect competition, the equilibrium price is sometimes called
A Administered price
B Market-clearing price
C Discriminatory price
D Predatory price
It “clears” the market by equating quantity demanded and supplied.
A necessary condition for a single price in perfect competition is
A Product differentiation
B Perfect information
C Price leadership
D Collusion
With perfect knowledge, buyers and sellers know prevailing price, preventing different prices for same product.
If a firm in perfect competition raises price above market price, its sales become
A Higher
B Unchanged
C Zero
D Double
Customers will buy from other firms at market price since products are identical.
When a competitive firm sells more output at constant price, MR remains
A Rising
B Constant
C Falling
D Negative
With constant price, each extra unit adds the same revenue, so MR is constant.
A competitive firm reaches equilibrium at output where
A P = MC and MC is rising
B P = AC and AC is rising
C P = AVC and AVC is rising
D TR is maximum
Profit maximization requires MR (=P) = MC with MC rising at that point for stability.
Short-run supply response in perfect competition is mainly governed by
A Fixed cost
B Marginal cost
C Total fixed cost
D Average fixed cost
The firm’s short-run supply is its MC curve above AVC.
In perfect competition, long-run industry supply is more elastic primarily because
A Demand is fixed
B Firms can change plant size and new firms can enter
C MR becomes negative
D Costs are sunk
In long run, firms can adjust all inputs and entry/exit occurs, making supply more responsive.
When a competitive industry earns supernormal profit, the typical long-run effect is
A Price rises further permanently
B Entry occurs, price falls
C Output falls, price rises
D Demand becomes perfectly inelastic
Profits attract new firms, increasing supply and lowering price until only normal profit remains.
When a competitive industry suffers losses, the typical long-run effect is
A Entry occurs and price falls
B Exit occurs and price rises
C Output rises and losses increase
D Price becomes fixed by one firm
Losses cause firms to exit, reducing supply and increasing price to restore normal profit.
In perfect competition, a firm’s economic profit in long run is
A Always positive
B Always negative
C Zero (normal profit)
D Infinite
Long-run equilibrium yields normal profit, meaning zero abnormal economic profit.
The primary goal of price determination analysis is to explain
A How wages are fixed
B How equilibrium price and quantity are set
C How GDP is measured
D How taxes are collected
Price determination studies how demand and supply interact to determine equilibrium price and quantity.
A perfectly competitive market is considered most efficient because it achieves
A Collusion and high profit
B Price rigidity
C Allocative and productive efficiency in long run
D Price discrimination automatically
In long-run equilibrium, P = MC (allocative) and production at minimum AC (productive), leading to maximum efficiency.