Download Chapter 7: Perfect Competition

Chapter 8: Perfect Competition
LEARNING OBJECTIVES
The steps to achieve the learning objectives include reading sections from your textbook and the
“causation chain game,” which is available directly on the Tucker web site. The steps also include
references to “Ask the Instructor Video Clips,” the “Graphing Workshop” available through
CourseMate on the Tucker website.
#1 - Explain why a perfectly competitive firm produces the quantity of output where its marginal
revenue equals marginal cost (MR = MC).
Step 1
Read the sections in your textbook titled “Perfect Competition,” “Short-Run Profit
Maximization for a Perfectly Competitive Firm,” “Short-Run Loss Minimization for a
Perfectly Competitive Firm,” and the subsection titled “The Perfectly Competitive Firm’s
Short-Run Supply Curve.”
Step 2
Watch the Graphing Workshop “See It!” tutorial titled “Deriving the Short-Run Supply
Curve.” Study that the perfectly competitive firm faces a horizontal demand curve and
produces where MR = MC.
*Step 3
Watch the Graphing Workshop “See It!” tutorial titled “Short-Run Supply Decison.”
Study that there are two methods to compute the price and quantity of output: (1) the total
revenue-total cost method and (2) the marginal revenue equals total cost method.
Step 4
Read the Graphing Workshop “Grasp It!” exercise titled “Short-Run Supply Decision.”
This exercise uses a slider bar to demonstrate how the perfectly competitive firm
determines its price and quantity of output.
Step 5
Create a new graph at the Graphing Workshop “Try It!” exercise titled “Short-Run
Supply Decision.” This exercise illustrates how a firm determines whether it is earning
an economic profit, breaking even, suffering a loss, or should shut down.
Step 6
Listen to the “Ask the Instructor Video Clip” titled “Is the Used Car Market Perfectly
Competitive?” You will learn why a used car market is not perfectly competitive.
The Result
By following these steps, you have learned that a perfectly competitive firm faces a
horizontal (perfectly elastic) demand curve determined by the supply and demand curves
in its industry. If MR > MC, profit increases by producing an additional unit that adds
more to revenue that to cost. If MC > MR, profit increases by producing less units rather
than adding more to total cost than total revenue. Therefore, only when MR = MC is
there no further adjustment of output.
#2 - Understand the perfectly competitive industry’s short-run and long-run equilibrium conditions.
Step 1
Read the subsections in your textbook titled “The Perfectly Competitive Industry’s ShortRun Supply Curve” and “Short-Run Equilibrium for a Perfectly Competitive Firm.”
Step 2
Watch the Graphing Workshop “See It!” exercise titled “Short-Run Profit Maximization
and Market Equilibrium.” Study how the competitive industry’s short-run supply curve
for wheat is derived from each firm’s marginal cost curve.
Step 3
Play the “Causation Chains Game” titled “The Short-Run Shutdown Point.”
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Step 4
Listen to the “Ask the Instructor Video Clip” titled “Do Competitive Firms Earn
Economic Profit in the Long Run?” You will learn the theory of perfect competition in
the long run.
The Result
By following these steps, you have learned that the industry supply curve is the aggregate
of each firm’s MC curve above the minimum point on the AVC curve (the shutdown
point). Also, you have learned that a perfectly competitive firm earns zero economic
profit in the long run. The explanation is because positive profits attract firms that enter
the industry and increase the industry supply curve, causing the price to fall until profits
are zero. Negative profits cause firms to leave the industry and decrease the industry
supply curve, causing the price to rise until profits are zero.
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