1. Do Now: What are the characteristics of a competitive market?
Aim: How do large firms maximize their profit based on competitive markets?
Objective: SWBAT analyze the link between supply and demand to maximize profits based on a competitive market.
Do Now: What are the characteristics of a competitive market?

2. Characteristics
A perfectly competitive market has the following characteristics:
There are many buyers and sellers in the market.
The goods offered by the various sellers are largely the same.
Firms can freely enter or exit the market.

3. Outcomes
As a result of its characteristics, the perfectly competitive market has the following outcomes:
The actions of any single buyer or seller in the market can have a negligible impact on the market price.
Each buyer and seller takes the market price as given.

4. The Definition of Supply and Perfect Competition
If all the necessary conditions for perfect competition exist, we can talk formally about the supply of a produced good.
This follows from the definition of supply.

5. The Definition of Supply and Perfect Competition
Supply is a schedule of quantities of goods that will be offered to the market at various prices.

6. The Definition of Supply and Perfect Competition
This definition requires the supplier to be a price taker (the first condition for perfect competition).

7. The Definition of Supply and Perfect Competition
Because of the definition of supply, if any of the conditions are not met, the formal definition of supply disappears.

8. The Definition of Supply and Perfect Competition
That the number of suppliers be large (the second condition), means that they do not have the ability to collude.

9. Demand Curves for the Firm and the Industry
The demand curves facing the firm is different from the industry demand curve.
A perfectly competitive firm’s demand schedule is perfectly elastic even though the demand curve for the market is downward sloping.

10. Demand Curves for the Firm and the Industry
This means that firms will increase their output in response to an increase in demand even though that will cause the price to fall thus making all firms collectively worse off.

11. Profit-Maximizing Level of Output
The goal of the firm is to maximize profits.
When it decides what quantity to produce it continually asks how changes in quantity affect profit.

12. Profit-Maximizing Level of Output
Since profit is the difference between total revenue and total cost, what happens to profit in response to a change in output is determined by marginal revenue (MR) and marginal cost (MC).
A firm maximizes profit when MC = MR.

13. Profit-Maximizing Level of Output
Marginal revenue (MR) – the change in total revenue associated with a change in quantity.
Marginal cost (MC) -- the change in total cost associated with a change in quantity.

14. Marginal Revenue
Since a perfect competitor accepts the market price as given, for a competitive firm, marginal revenue is price (MR = P).

15. Marginal Cost Initially, marginal cost falls and then begins to rise.
Marginal concepts are best defined between the numbers.

16. Goal of a Competitive Firm: Profit Maximization
The goal of a competitive firm is to maximize profit.
This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.
Profit maximization occurs at the quantity where marginal revenue equals marginal cost.