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Perfect Competition
Modules 58, 59, and 60
Assumptions
1. Many Firms: Identical Products
2. No Entry/Exit restrictions
3. New vs Old firms have no
advantages over each other
4. Seller/Buyer informed about
price
These arise when…
• Market Demand is large relative
to output of single producer
• No economies of scale are
present
• All products are same quality
(buyer sees no distinction)
Examples:
• Wheat industry
• Fishing
• Manufacturing of paper cups and
plastic shopping bags
• Lawn service
• Dry cleaning
Analysis
• S-R: achieves goal by deciding Q
to produce
• L-R: Choice is whether to enter or
exit a market
• They DO NOT price to sell… only
set quantity!
Price-Taker
• So many producers, increasing price
means they will not sell product!
• Decrease of price makes no sense
because they know they can sell
100% produced at market price
• They TAKE the price determined by
market!
Revenue…
• Price determined by market S
& D curves (Market Graph)
• MR = Price for the firm (Firm
Graph)
• Perfect elasticity of MR (Firm
Graph)
• MR=D for the firm (Firm Graph)
Maximizing Profit
Two options:
1.Use TR and TC curves
2.Marginal Analysis
1. TR/TC Curves
• Economic Profit = TR-TC
• Greatest distance between TC
and TR curves is profit-max
point
$
TC
TR
BreakEven
Loss
Profit
Greatest distance = Max
Profit
Loss
Q
EP
Profit
1
0
-1
Loss
Q
Max Profit!
2. Marginal Analysis
• Use the MR=MC rule
• Put Market Graph next to Firm Graph
• Do not forget effects of S and D shifts
on equilibrium (equilibrium in industry
set MR in the firm)
Zero Profit: LR Equilibrium
P
P
S
D
MC
ATC
MR
P1
Q1
Q1
Q
Industry
Q
Firm
Next Video…
• Video 2 will work with Perfect Competition
Graphs
• Included will be an analysis of the 4 profit
conditions of the PC Firm:
– Zero Profit (Long –Run ‘equilibrium’)
– Positive Profit (Short-Run only)
– Negative Profit (Short-Run Only)
– Shut-Down (Long-Run Decision)