1. Chapter 7. Perfect Competition What is it? Firm behavior Short run Long run What is it? Firm behavior Short run Long run

2. Perfect Competition many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage

3. examplesexamples wheat farming dry cleaning paper cups wheat farming dry cleaning paper cups

4. Firm Behavior maximize profits TR > TC  economic profits TR = TC  normal profits maximize profits TR > TC  economic profits TR = TC  normal profits

5. Firm is price taker cannot influence price  take price as given, choose Q firm demand is perfectly elastic  horizontal line MR = P  firm sells all it wants at price, P cannot influence price  take price as given, choose Q firm demand is perfectly elastic  horizontal line MR = P  firm sells all it wants at price, P

6. Profit maximizing firm chooses Q to max profits  where TR - TC is largest -- where MR = MC why MR = MC?  MR > MC -- output adding to profit  MR < MC -- output taking away from profit firm chooses Q to max profits  where TR - TC is largest -- where MR = MC why MR = MC?  MR > MC -- output adding to profit  MR < MC -- output taking away from profit

7. Market for syrup (all firms) P Q (cans/day) D S $8 100

8. Firm’s demand, cost curve P Q (cans/day) $8 D = MR = P MC 10

9. firm is price taker what if price too low to earn profit?  economic loss  will firm exit? firm is price taker what if price too low to earn profit?  economic loss  will firm exit?

10. costs & exit firm will stay, in SR, if  P > AVC why?  if firm exits, loses TFC  if P = AVC -- loss from staying = loss from exit firm will stay, in SR, if  P > AVC why?  if firm exits, loses TFC  if P = AVC -- loss from staying = loss from exit

11. SR equilibrium two cases  economic profit  economic loss two cases  economic profit  economic loss

12. Case 1: economic profit P = $8, Q = 10 ATC = $5 profit = ($8)(10) - ($5)(10) = $30 P = $8, Q = 10 ATC = $5 profit = ($8)(10) - ($5)(10) = $30

13. P Q (cans/day) $8 D = MR = P MC 10 ATC $5 economic profit

14. case 2: economic loss P = $3, Q = 7 ATC = $5 profit = ($3)(7) - ($5)(7) = - $14 P = $3, Q = 7 ATC = $5 profit = ($3)(7) - ($5)(7) = - $14

15. P Q (cans/day) $3 D = MR = P MC 7 ATC $5 economic loss

16. 12.3 LR Equilibrium entry & exit of firms firms earn normal profit  economic profit will be zero entry & exit of firms firms earn normal profit  economic profit will be zero

17. why zero economic profit? if economic profit > zero  firms enter (S shifts right)  price falls  profit falls to zero if economic profit > zero  firms enter (S shifts right)  price falls  profit falls to zero

18. P Q (cans/day) D S $8 100 S’ $5 120 market for syrup

19. Syrup firm P Q (cans/day) D = MR = P MC ATC $5 zero economic profit

20. if economic profit < zero  firms exit (S shifts left)  price rises  profit rises to zero if economic profit < zero  firms exit (S shifts left)  price rises  profit rises to zero

21. P Q (cans/day) D S $5 120 market for syrup $3 140 S’’

22. P Q (cans/day) $3 D = MR = P MC 7 ATC $5 economic loss

23. Syrup firm P Q (cans/day) D = MR = P MC ATC $5 zero economic profit

24. Shifts in market demand change price in SR  profits or losses in LR affect exit/entry  return to zero economic profit change price in SR  profits or losses in LR affect exit/entry  return to zero economic profit

25. SummarySummary price takers MR = MC determines equilibrium Q  SR: economic profit or loss  LR: economic profit is zero due to entry/exit price takers MR = MC determines equilibrium Q  SR: economic profit or loss  LR: economic profit is zero due to entry/exit