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Perfect Competition
ECONOMICS: Principles and Applications 3e
HALL & LIEBERMAN
© 2005 Thomson Business and Professional Publishing
Figure 1 The Competitive
Industry and Firm
1. The intersection of the market supply
and the market demand curve…
Price per
Ounce
(a) Market
3. The typical firm can sell all it
wants at the market price…
Price per
Ounce
(b) Firm
S
$400
$400
D
Ounces of Gold per Day
2. determine the equilibrium
market price
Demand
Curve Facing
the Firm
Ounces of Gold per Day
4. so it faces a horizontal
demand curve
Table 1 Cost and Revenue Data
for Small Time Gold Mines
Figure 2 Profit Maximization in
Perfect Competition
(a)
Dollars
TR
$2,800
TC
Maximum Profit
per Day = $700
2,100
550
Slope = 400
1
2
3
4
5
6
7
8
9
10
Ounces of Gold per Day
Figure 2 Profit Maximization in
Perfect Competition
(b)
Dollars
MC
$400
D = MR
1
2
3
4
5
6
7
8
9
10
Ounces of Gold per Day
Figure 3 Measuring Profit or Loss
(a) Economic Profit
Dollars
ATC
Profit per Ounce ($100)
MC
d = MR
$400
300
1
2
3
4
5
6
7
8
Ounces of
Gold per Day
Figure 3 Measuring Profit or Loss
(b) Economic Loss
Dollars
MC
Loss per Ounce ($100)
ATC
$300
200
d = MR
1
2
3
4
5
6
7
8
Ounces of
Gold per Day
Figure 4 Short-Run Supply Under
Perfect Competition
(a)
(b)
Price per
Bushel
Dollars
ATC
MC
Curve
$3.50
d1=MR1
$3.50
2.50
2.00
d2=MR2
d3=MR3
2.50
2.00
d4=MR4
d5=MR5
1.00
0.50
1.00
0.50
AVC
Bushels
1,000
4,000
7,000 per Year
2,000
5,000
Firm's Supply
2,0004,000
5,000
Bushels
7,000 per Year
Figure 5 Deriving the Market
Supply Curve
1. At each price . . .
3.The total supplied by all firms at different
prices is the market supply curve.
(b) Market
(a) Firm
Price per
Bushel
$3.50
Firm's Price per
Bushel
Supply
Curve
$3.50
2.50
2.00
2.50
2.00
1.00
0.50
1.00
0.50
2,000 4,000
7,000 Bushels
per Year
5,000
2. the typical firm supplies the
profit-maximizing quantity.
Market
Supply
Curve
400,000 700,000 Bushels
per Year
200,000 500,000
Figure 6 Perfect Competition
Figure 7 Short-Run Equilibrium in
Perfect Competition
1. When the demand curve is D1 and
market equilibrium is here . . .
Price per
Bushel
2. the typical firm operates here, earning
economic profit in the short run.
(a) Market
(b) Firm
Dollars
S
MC ATC
$3.50
2.00
D1
d1
$3.50
Loss per Bushel
at p = $2
2.00
d2
Profit per Bushel
at p = $3.50
D2
Bushels
400,000 700,000 per Year
3. If the demand curve shifts to
D2 and the market equilibrium
moves here . . .
4,000
7,000
Bushels
per Year
4. the typical firm operates here and
suffers a short-run loss.
Figure 8 From Short-Run Profit to
Long-Run Equilibrium
(a) Market
(b) Firm
S1
Price per
Bushel
A
$4.50
Dollars
With initial supply
curve S1, market
price is $4.50…
So each firm
earns an
economic profit.
MC
A
d
ATC 1
$4.50
D
900,000
Bushels
per Year
5,000
9,000
Bushels
per Year
Figure 8 From Short-Run Profit to
Long-Run Equilibrium
(c) Market
(d) Firm
S1
Price per
Bushel
S2
Dollars
A
$4.50
A
$4.50
E
E
2.50
MC
ATC
d1
d1
2.50
D
900,000 1,200,000 Bushels
per Year
Profit attracts entry, shifting
the supply curve rightward…
5,000
9,000
until market price falls to
$2.50 and each firm earns
zero economic profit.
Bushels
per Year
Figure 9 Perfect Competition and
Plant Size
1. With its current plant and ATC
curve, this firm earns zero
economic profit.
Dollars
3. As all firms increase plant size and
output, market price falls to its lowest
possible level . . .
Dollars
MC1
LRATC
LRATC
ATC1
d1 = MR1
MC2 ATC
P1
2
E
P*
d2 = MR2
2. The firm could earn
positive profit with a
Output per 4. and all firms earn
Output per
q1 larger plant,
q*
Period
Period
producing here.
zero .economic profit
and produce at
minimum LRATC.
(a)
(b)
Figure 10 An Increasing-Cost
Industry
INITIAL EQUILIBRIUM
Price
per Unit
(a) Market
Dollars
(b) Firm
MC
S1
ATC1
P1
P1
A
A
d1 = MR1
D1
Q1
Output per
Period
q1
Output per
Period
Figure 10 An Increasing-Cost
Industry
NEW EQUILIBRIUM
Price
per Unit
(c) Market
S1
B
PSR
(d) Firm
MC
B
S2
PSR
dSR = MRSR
C
SLR
P2
P1
Dollars
P2
C
P1
A
ATC2
ATC1 d = MR
2
2
A
d1 = MR1
D2
D1
Q1 QSR Q2
Output per
Period
q1 q2 qSR
Output per
Period
Figure 11 Technological Change
in Perfect Competition
(b) Firm
(a) Market
Price per
Bushel
Dollars per
Bushel
S1
ATC1
S2
ATC2
d1 = MR1
A
$3
$3
B
2
d2= MR
2
D
Q1
Q2
Bushels
per Day
1000
Bushels
per Day