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

TR$ Q TC Break- Even Greatest distance = Max Profit Loss Profit Loss

EP Q 0 1 Profit Loss 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)

PP QQ Industry Firm Q1 P1 MR D S MC ATC Zero Profit: LR Equilibrium

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)