A perfect competitor is a price taker, so it must accept the price dictated by the market Thus, the individual business’s demand curve is different than the market demand curve Recall, Market Demand Curve (D m ) has a negative slope, since price and quantity are inversely related Since a perfect competitor is one of many businesses in a market, the quantity it chooses to supply has no effect on equilibrium price and quantity in the market 5.2 Perfect Competition in the Short Run

Equilibrium occurs where the market demand and supply curves meet (graph on left) The equilibrium price sets the position of the business’s demand curve (graph on right) Demand Faced by a Perfect Competitor

Revenue Conditions

Regardless of market type, a business can maximize its profit using: Profit-Maximizing Output Rule: Produce at the level of output where marginal revenue and marginal cost intersect Total Profit is the area of the rectangle PABC Profit Maximization

A business’s breakeven point (where price and average cost are equal) occurs when: Average Revenue (Price) = Average Cost A business’s shutdown point occurs at the level of output where price (average revenue) = minimum average variable cost Breakeven & Shutdown Points

At the point where MC = MR1, the price P1 exceeds average cost, and positive economic profits are made. At the point where MC = MR0, we have the breakeven point, where price = average cost At the point where AVC equals price P2 is the business’s shutdown point After the last point, the average variable costs would exceed price Supply Curve for a Perfect Competitor

Business Supply Curve – S b Market Supply Curve – S m If you’re given the Supply Curve for a business, then in order to make the supply curve for the market: >Keep the prices on the vertical axis the same >See how many identical businesses make up the market >Multiply the quantities (x-axis) by the number of identical businesses and you have your new x-axis points Business & Market Supply Curve