Competition in the Short Run

Profit

Price x quantity.

Five Requirements for Perfect Competition

1. High number of firms in the market 2. Goods are perfect substitutes: consumers believe that all firms sell identical products 3. Firms freely enter and exit the market (in the long run) 4. Perfect Information: buyer and seller know the prices charged by all firms 5. Transaction costs are low

Residual Demand

A firms individual demand curve. Demand is perfectly elastic and therefore curves are horizontal. No matter how much output a single firm sells, it cannot change the price.

Price takers

Competitive firms that take prices as given. There are many firms operating in the industry and each firm is too small to influence the price alone.

Individual Firm's Elasticity of Demand

Close to negative infinity for industries with many firms.

Short Run Industry Supply Curve

Horizontal sum of the individual supply curves of all firms. In the short run there is no entry or exit so the number of firms is fixed.

Shutdown Rule

In the short run, the firm should keep operating as long as it can cover its variable costs (assuming that all fixed costs are sunk).The firm should shut down if the price is less than average variable cost.

Marginal Revenue

Is equal to price in perfect competition.

Profit Maximisation

Set price equal to Marginal Cost.

Short Run competitive equilibrium

The intersection between the short run industry supply and industry demand.

Short Run Firm Supply Curve

The marginal cost curve above the minimum average variable cost curve. Will always be upward sloping.