Perfect Competition Concepts Conditions: Many firms in the market Firms should be able to enter and exit the

the market easily Homogeneous product (standardized product, Commodity) All firms and consumers in the market have complete information about prices, product quality, and production techniques.

Price takera firm that is operating in a perfectly competitive market Price taking behaviora price taker cannot control the price of the good it sells; it simply takes the market price as given, IMPOSSIBLE for a single firm to affect the market price by changing quantity supplied Perfectly competitive market demand curves: Demand for a firm is perfectly elasticshows price taker characteristics Demand curve for market is downward sloping

Short-run supply in a perfectly competitive market Firms objective is to maximize profits subject to two constraints: the consumers demand for the firms product and the firms costs of production Consumer demand determines the price at which a perfectly competitive firm may sell its output

Total revenuethe dollar amount that the firm earns from sales of its output (P x Q) Marginal Revenuethe dollar amount by which a firms total revenue changes in response to a 1-unit change in the firms output (the firms marginal revenue is equal to the market priceMR=P) Short-run Profit maximizationa firm maximizes its profits by choosing to supply the level of output where MR=MC Short-run LossesMR is below minimum ATC and above minimum AVC curve, firm will have to consider whether to shut down its operation in the future Shut-down decision when MR is below minimum AVC. In detail: the firm must pay its fixed costs, regardless of whether it produces any output. Hence the firms fixed costs are considered sunk costs and will not have any bearing on whether the firm decides to shut down. Thus, the firm will focus on its AVC in determining whether to shut down. Short-run supply curvethe portion of a firms MC curve that lies above its minimum AVC

Market short-run supply curve is the horizontal summation of all the individual firms short-run supply curves Long-run supply in a perfectly competitive marketfirms can vary all of their input factors allows for the possibility that new firms will enter the market and some existing firms will exit the market. In a perfectly competitive market, there are no barriers to the entry and exit of firms. New firms will enter market if there are positive economic profits, and existing firms will leave if they are earning losses (shut-down decision) Zero economic profitsnormal profits, long run equilibrium in perfectly competitive market due to entry and exit of firms Minimization of long-run ATCin the long run, a firm can adjust the amount it uses of all factor inputs, including those that are fixed in the short-run Examples: if, in the short-run, the firm is operating below its minimum efficient scale and experiencing economies of scale, in the long-run it can adjust its use of factor inputs so as to increase its output to the minimum efficient scale level. If the firm is experiencing diseconomies of scale because its short-run level of output exceeds its minimum efficient scale, in the long-run the firm can adjust its use of factor inputs so as to reduce its output to the minimum efficient scale level,

Both scenarios will ultimately end at the minimum point of the long-run ATC curve Long-run market supply curve is found by examining the responsiveness of short-run market supply to a change in market demand. The long-run market supply curve in an increasing-cost industry will be positively sloped