1 Chapters 9: Perfect Competition
2 Perfect Competition Assumptions: Free Entry All buyers and sellers have perfect information Many firms producing a homogenous product Factors of production are perfectly mobile in the long run Implications: Firms are “price takers,” that is, they cannot sell anything above the prevailing market price The firm’s supply curve will be the portion of their marginal cost curve above their average total cost curve In the long run, economic profits are zero
3 Perfect Competition: Numeric Example QuantityATCMC∏(P=22)∏(P=4)
4 Total Revenue and Total Cost TC TR Fixed Cost (-) Fixed Cost
5 Perfect Competition: Zero Profit Demand = Price = Marginal revenue wheat Price/Marginal Revenue Marginal cost Average total cost Supply curve
6 Perfect Competition: Negative Profit (losses) Demand = Price = Marginal revenue wheat Price/Marginal Revenue Marginal cost Average total cost losses
7 Perfect Competition: Positive Profit Demand = Price = Marginal revenue wheat Price/Marginal Revenue Marginal cost Average total cost Profits
8 Perfect Competition: Labeling Curves/Optimums/Profit/Loss A B C D E G H I J K L M N O P Q R S T U V W F
9 Supply/Shutdown Decision Competitive firms will, in the short run, supply products so long as price must equal marginal cost on a rising portion of the MC curve, and it must exceed the minimum value of the AVC curve MC AVC Supply Shut Down P Q
10 Short-Run Competitive Industry Supply Curve MC 1 S = MC 1 + MC
11 Elasticity of Supply Price elasticity of supply - the percentage change in quantity supplied that occurs in response to a 1 percent change in product price –Short-run competitive industry supply curve will always be upward sloping because of the law of diminishing marginal returns implying elasticity of supply is always positive
12 Algebra of Market and Individual Firm Output A market consists of 100 firms. For each firm, Total market supply is given by If market demand is given by Then the profit for each firm is given by Profit in the market is equal to