1. Perfect Competition
Chapter 11

2. Profit Maximization
Economic profit is total revenue less total costs which consist of implicit and explicit costs.
Economic profit differs from accounting profit in that accounting profit does not consider implicit costs.

3. Normal profit is the opportunity cost of the resources owned by the firm

4. Assumption of profit maximization

5. What is a perfectly competitive firm?
A firm with the following attributes:
Standardized product
A price taker
Factors of production are mobile in the long-run
The firm and consumers have perfect information

6. 2 assumptions about short-run production
Number of firms is fixed
Each firm has some fixed inputs

7. Profit maximization in the short-run
We ask the question:
How does a firm choose a level of output in the short-run with the objective of maximizing profit?

8. Compare total revenue and total cost
Compare marginal revenue and marginal cost

9. Where is the short-run supply curve?
It is represented by the upward sloping section of the marginal cost curve beginning where AVC = MC.

10. Short-run industry supply
The horizontal aggregate of individual firm supply curves.

11. The short-run competitive equilibrium
How is price determined in the short-run?

12. Is the short-run competitive equilibrium efficient?
A competitive equilibrium is allocatively efficient when there is no room for further mutually beneficial exchange.

13. Producer Surplus
A measure of “how much better off a firm is as a result of having supplied its profit maximizing level of output”.

14. Perfect Competition in the long-run
Firms may enter and leave the industry.
Firms may change their scale of production by changing all inputs.
Firms earning a loss will shut down.

15. Adjustment process from short-run to long-run
How long will it take?
Depends on
Degree that firms are identical in technology, cost structure, and efficiency.
How long does it take to adjust capital stock?
How long does it take for new firms to enter?

16. Socially desirable properties of the long-run outcome
P=MC in short-run and long-run
Allocative efficiency
Mutual gains to buyers and sellers are maximized.
All firms earn an economic profit of zero
Buyers do not pay more than what it costs the firms to produce.

17. There is no such thing as a free market
The market is not costless

18. The long-run market supply curve
Varies depending on cost conditions
3 cases
All firms have identical LAC curves
All firms have horizontal LAC curves
Changing input prices

19. Price elasticity of supply
A measure of responsiveness of quantity supplied to changes in prices