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PERFECT
COMPETITION
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excitement!!
Characteristics of a PC
Market
1. Very large numbers
• Both buyers and sellers, so that no one has control
2. Standardized product
• Products must be identical so that no one will pay more
for what they perceive to be better quality
3. “Price takers”
• Producers have no control over the price in the market
4. Free entry and exit
• Start up costs and technologies are such that anyone
can freely enter the market
Quizzy-Wizzy Woo
1. Which idea is inconsistent with pure
competition?
A. short-run losses
B. product differentiation
C. freedom of entry or exit for firms
D. a large number of buyers and sellers
Quizzy-Wizzy Woo
2.
A purely competitive firm can be identified by the fact that:
A. there are other firms in the industry producing close
substitutes.
B. it is making only normal profits in the short run.
C. its average revenue equals marginal revenue.
D. it experiences diminishing marginal returns.
Demand for the PC firm
■ The PC firm faces a demand
curve that neither it, nor the
consumer can control
■ Therefore the firm can only sell
at the price determined by the
market, and all firms face the
same price
■ This creates a perfectly elastic
demand curve
■ Average revenue and marginal
revenue remain constant.
■ This is because each product
sells at the same price, no
matter the quantity sold.
■ This is where we get MRDARP!
Quizzy-Wizzy Woo
3. In pure competition, the demand for the
product of a single firm is perfectly:
A. elastic because the firm produces a unique
product.
B. inelastic because the firm produces a
unique product.
C. elastic because many other firms produce
the same product.
D. inelastic because many other firms produce
the same product.
Profit Maximization
There are 2 approaches: TR-TC and MR=MC
1. MR=MC
• Where marginal cost = marginal revenue
• All quantities before this are marginally profitable, all
quantities following this are marginally unprofitable
The Golden Rule of Economics!!!!
MR=MC
Learn it, know it, live it!!!!!
Normal Profit/Economic Profit
■ Firms in a PC market will
eventually operate at equilibrium
■ This LR equilibrium returns a
normal profit to entrepreneurs
and occurs at:
 P= minimum ATC
■ If the firm is operating above
P=minimum ATC they realize an
economic profit in the short run
■ If P > minimum ATC more firms
will enter the market to realize
the economic profits
■ Profits will erode away as
additional supply lowers the
price to LR equilibrium.
Quizzy-Wizzy Woo
5. Based on the graph
above, the firm is
earning:
A. zero normal profits.
B. zero economic
profits.
C. zero accounting
profits.
D. we can say nothing
about this firm's profit
or loss situation
Loss Minimization and Shutdown
■ Occasionally a firm will choose to
operate at a loss in the short run
■ This occurs when
 P< ATC and P > AVC
■ This may be more favorable than
shutting down however
■ If a firm can cover all its variable
costs, and a part of its fixed costs,
it is better than shutting down
■ A firm will generally shut down
when
 P < AVC
Quizzy-Wizzy Woo
6. Let us suppose Chuck's, a local supplier of
chili and pizza, has the following revenue and
cost structure:
A. Chuck's should stay open in the long run.
B. Chuck's should shut down in the short run.
C. Chuck's should stay open in the short run.
D. Chuck's should shut down in the short run
but reopen in the long run.
Quizzy-Wizzy Woo
7. What is the minimum
price for this firm to
realize a normal profit
A.
B.
C.
D.
E.
$2.60
$4.00
$4.90
$6.70
$2.80
The MC Curve as the Supply Curve
■ The MC curve for a PC firm
also doubles as the shortrun supply curve
■ This is because P=MR and
all firms produce at
MR=MC
■ Therefore PC firms
produce where P=MC
■ Each time P shifts, we
produce at a new Q.
■ The supply curve is simply
a set of prices and
quantities
■ The MC curve represents
those prices and
corresponding quantities
Quizzy-Wizzy Woo
8. In general, the supply curve of a purely competitive firm is:
A. identical to the marginal-cost curve.
B. a horizontal line equal to the market price.
C. the rising portion of the average-total-cost (ATC) curve.
D. the rising portion of the marginal-cost curve above the AVC
curve.
Quizzy-Wizzy Woo
9.
If a firm is a price taker, then the demand curve for the
firm's product is:
A. equal to the total revenue curve.
B. perfectly inelastic.
C. perfectly elastic.
D. unit elastic.
Long Run Equilibrium for a PC firm
Quizzy-Wizzy Woo
10. In pure competition, price is determined where the
industry:
A. demand and supply curves intersect.
B. total cost is greater than total revenue.
C. demand intersects the firm's marginal cost curve.
D. average total cost equals total variable costs.
Allocative and Productive
Efficiency
Allocative Efficiency
Productive Efficiency
■ Occurs at the point where
 P= minimum ATC
■ This means that the firm is
producing at the minimum
possible cost
■ Firms use best available
production methods and least
cost methods
■ Consumers pay the lowest
possible price
■ Occurs at the point where
 P=MC
■ This means that the firm is
providing society with the
goods consumers want the
most
■ If a resource is underallocated
 P>MC
■ If a resource if overallocated
 P<MC
Quizzy-Wizzy Woo
11. Productive efficiency refers to:
A. cost minimization, where P = minimum ATC.
B. production, where P = MC.
C. maximizing profits by producing where MR
D. setting TR = TC.
= MC.
Quizzy-Wizzy Woo
12. Allocative efficiency refers to:
A.
Maximizing profits
B.
Producing at the lowest possible cost
C.
Using resources most efficiently
D.
Producing what society most wants
Quizzy-Wizzy Woo
13.Refer to the above graph. It
shows the short-run cost
curves for a purely
competitive firm together
with a number of different
prices. At what price is the
firm making an economic
profit?
A. P1
B. P2
C. P3
D. P4
Quizzy-Wizzy Woo
14. Which is true for a purely competitive firm in short-run
equilibrium?
A. The firm is making only normal profits.
B. The firm's marginal cost is greater than its marginal
revenue.
C. The firm's marginal revenue is equal to its marginal cost.
D. A decrease in output would lead to a rise in profits.
Quizzy-Wizzy Woo
15. When a firm produces less output, it can reduce:
A. its fixed costs but not its variable costs.
B. its variable costs but not its fixed costs.
C. average fixed cost.
D. marginal revenue.