Chapter 7 - Perfect Competition

Three market characteristics of a market structure

(1) the number of sellers (2) the nature of the product (3) the ease of entry into or exit from the market

Perfect competition

A market structure in which an individual firm cannot affect the price of the product it produces. Each firm in the industry is very small relative to the market as a whole, all the firms sell a homogeneous product, and firms are free to enter and exit the industry.

Marginal revenue equals marginal cost method (MR=MC)

A second approach to finding where a firm maximizes profits. The firm maximizes profit or minimizes loss by producing the output where marginal revenue equals marginal cost. If the price (average revenue) is below the minimum point on the average variable cost curve, the rule does not apply, and the firm shuts down to minimize its losses.

Price-taker

A seller that has no control over the price of the product it sells. From the individual firm's perspective, the price of its products is determined by market supply and demand conditions over which the firm has no influence.

A price-taker firm in perfect competition

Faces a perfectly elastic demand curve. It can sell all it wishes at the market-determined price, but it will sell nothing above the given market price. This is because so many competitive firms are willing to sell the same product at the going market price.

Total revenue-total cost method

One way a firm determines the level of output that maximizes profit. Profit reaches a maximum when the vertical difference between the total revenue and the total cost curves is at a maximum.

Marginal revenue (MR)

The change in total revenue from a one-unit change in output. Marginal revenue for a perfectly competitive firm equals the market price.

Market structures

The different market conditions firms sell goods and services under.

Perfectly competitive industry's short-run supply curve

The horizontal summation of the short-run supply curves of all firms in the industry.

Perfectly competitive firm's short-run supply curve

The relationship between the price of a product and the quantity supplied in the short run. The individual firm always produces along its marginal cost curve above its intersection with the average variable cost curve.

Long-run perfectly competitive equilibrium

When a firm earns a normal profit by producing where price equals minimum long-run average cost equals minimum short-run average total cost equals short-run marginal cost.