1. Perfect Competition

2. Review Identify the 4 Market Structures
Identify the characteristics of perfect competition
Why is a perfectly competitive firm a “price taker”?
Explain why perfectly competitive firms make little profit
How do ALL firms determine what output to produce?
Draw a perfectly competitive firm producing 10 units at a price of $10 making a profit of $30
Draw and label a perfectly competitive firm making a loss.
On your graph, identify the shut down point
List 10 words that rhyme with the word “great”

3. Side-by-side graph for perfectly completive industry and firm.
Is the firm making a profit or a loss? Why? P S P MC
ATC
MR=D
$15
$15
AVC D Q
5000 8 Q
Firm
(price taker)
Industry 3

4. Where is the profit maximization point? How do you know?
What output should be produced?
What is TR?
What is TC?
How much is the profit or loss?
Where is the Shutdown Point?
$25 20 15 10 MC
MR=P
Profit
ATC
Cost and Revenue
AVC
Total Revenue
Total Cost

5. Supply Revisited 5

6. Marginal Cost and Supply As price increases, the quantity increases
$50 45 40 35 30 25 20 15 10 5 MC
ATC
MR5
Cost and Revenue
AVC
MR4
MR3
MR2
MR1 Q 6

7. MC above AVC is the supply curve
Marginal Cost and Supply
When price increases, quantity increases
When price decrease, quantity decreases
$50 45 40 35 30 25 20 15 10 5 MC
= Supply
ATC
Cost and Revenue
AVC Q 7

8. Marginal Cost and Supply
What if variable costs increase (ex: tax)?
MC2=Supply2
$50 45 40 35 30 25 20 15 10 5
MC1=Supply1
AVC
Cost and Revenue
AVC
When MC increases, SUPPLY decrease Q 8

9. Marginal Cost and Supply
What if variable costs decrease (ex: subsidy)?
MC1=Supply1
$50 45 40 35 30 25 20 15 10 5
MC2=Supply2
AVC
Cost and Revenue
AVC
When MC decreases, SUPPLY increases Q 9

10. Perfect Competition in the Long-Run
You are a wheat farmer. You learn that there is a more profit in making corn. What do you do in the long run?

11. (No Economic Profit=Normal Profit)
In the Long-run…
Firms will enter if there is profit
Firms will leave if there is loss
So, ALL firms break even, they make NO economic profit
(No Economic Profit=Normal Profit)
In long run equilibrium a perfectly competitive firm is EXTREMELY efficient.

12. Is the firm making a profit or a loss? Why?
Side-by-side graph for perfectly completive industry and firm in the LONG RUN
Is the firm making a profit or a loss? Why? P S P MC
ATC
MR=D
$15
$15 D Q
5000 8 Q
Firm
(price taker)
Industry 12

13. Firm in Long-Run Equilibrium
Price = MC = Minimum ATC
Firm making a normal profit P MC
ATC
$15
MR=D
There is no incentive to enter or leave the industry
TC = TR 8 Q 13

14. Going from Long-Run to Short-Run14

15. Is this the short or the long run? Why?
What will firms do in the long run?
What happens to P and Q in the industry?
What happens to P and Q in the firm? P S P MC
ATC
$15
$15
MR=D D Q
5000
6000 8 Q
Industry
Firm 15

16. Firms enter to earn profit so supply increases in the industry
Price decreases and quantity increases P S P MC S1
ATC
$15
$15
MR=D
$10 D Q
5000
6000 8 Q
Industry
Firm 16

17. Price falls for the firm because they are price takers.
Price decreases and quantity decreases P S P MC S1
ATC
$15
$15
MR=D
$10
$10
MR1=D1 D Q
5000
6000 5 8 Q
Industry
Firm 17

18. New Long Run Equilibrium at $10 Price
Zero Economic Profit P P MC S1
ATC
$10
$10
MR1=D1 D Q
5000
6000 5 Q
Industry
Firm 18

19. Is this the short or the long run? Why?
What will firms do in the long run?
What happens to P and Q in the industry?
What happens to P and Q in the firm? P S P MC
ATC
$15
$15
MR=D D Q
4000
5000 8 Q
Industry
Firm 19

20. Firms leave to avoid losses so supply decreases in the industry
Price increases and quantity decreases S1 P S P MC
ATC
$20
$15
$15
MR=D D Q
4000
5000 8 Q
Industry
Firm 20

21. Price increase for the firm because they are price takers.
Price increases and quantity increases S1 P S P MC
ATC
$20
$20
MR1=D1
$15
$15
MR=D D Q
4000
5000 8 9 Q
Industry
Firm 21

22. New Long Run Equilibrium at $20 Price
Zero Economic Profit S1 P P MC
ATC
$20
$20
MR1=D1 D Q 9
4000 Q
Industry
Firm 22

23. Going from Long-Run to Long-Run23

24. Currently in Long-Run Equilibrium
If demand increases, what happens in the short-run and how does it return to the long run? P S P MC
ATC
MR1=D1
$15
$15
MR=D D Q
5000 8 Q
Industry
Firm 24

25. Demand Increases The price increases and quantity increases
Profit is made in the short-run P S P MC
ATC
$20
$20
MR1=D1
$15
$15
MR=D D1 D Q
5000 8 9 Q
Industry
Firm 25

26. Firms enter to earn profit so supply increases in the industry
Price Returns to $15 P S S1 P MC
ATC
$20
$20
MR1=D1
$15
$15
MR=D D1 D Q
5000
7000 8 9 Q
Industry
Firm 26

27. Back to Long-Run Equilibrium
The only thing that changed from long-run to long-run is quantity in the industry P S1 P MC
ATC
$15
$15
MR=D D1 D Q
7000 8 Q
Industry
Firm 27

28. Efficiency

29. 1. Productive Efficiency 2. Allocative Efficiency
PURE COMPETITION AND EFFICIENCY
In general, efficiency is the optimal use of societies scarce resources
Perfect Competition forces producers to use limited resources to their fullest.
Inefficient firms have higher costs and are the first to leave the industry.
Perfectly competitive industries are extremely efficient
There are two kinds of efficiency:
1. Productive Efficiency
2. Allocative Efficiency

30. Efficiency Revisited Productive Efficient combinations are A through D
Which points are productively efficient?
Which are allocatively efficient? 14 12 10 8 6 4 2
Productive Efficient combinations are A through D
(they are produced at the lowest cost) A B G
Bikes
Allocative Efficient combinations depend on the wants of society C E F D
Computers 30

31. Productive Efficiency
The production of a good in a least costly way. (Minimum amount of resources are being used)
Graphically it is where…
Price = Minimum ATC

32. Short-Run MC ATC D=MR Price
Profit
Price P
Notice that the product is NOT being made at the lowest possible cost
(ATC not at lowest point). Q
Quantity

33. Short-Run MC ATC Price D=MR Quantity P Q
Loss
D=MR
Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point). Q
Quantity

34. Long-Run Equilibrium MC ATC Price D=MR
Notice that the product is being made at the lowest possible cost (Minimum ATC) Q
Quantity

35. Why? Price represents the benefit people get from a product.
Allocative Efficiency
Producers are allocating resources to make the products most wanted by society.
Graphically it is where…
Price = MC
Why? Price represents the benefit people get from a product.

36. Optimal amount being produced
Long-Run Equilibrium MC MR P
Price
Optimal amount being produced
The marginal benefit to society (as measured by the price) equals the marginal cost. Q
Quantity

37. What if the firm makes 15 units?MC MR $5
Price
The marginal benefit to society is greater the marginal cost.
Not enough produced.
Society wants more $3 15 20
Underallocation of resources
Quantity

38. What if the firm makes 22 units?MC $7 MR $5
Price
The marginal benefit to society is less than the marginal cost.
Too much Produced.
Society wants less 20 22
Overallocation of resources
Quantity

39. Long-Run Equilibrium P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! MC
D=MR
Price P
P = Minimum ATC = MC
EXTREMELY EFFICIENT!!!! Q
Quantity 39