Econ Perfect Competition

The Short-Run Individual Supply Curve

-It shows how an individual producer's optimal output quantity depends on the market price, taking FC as given. -A firm will cease production in the short-run if the market price falls below the shut-down price, which is equal to minimum AVC.

Long-Run Supply Curve

-Long-Run SC is the portion of the MC curve that lies above the ATC curve -When below the ATC curve, the firm shuts down

Zero Economic Profit in the Long-Run

-PC firms earn zero economic profit in the Long-Run due to free entry and exit -If profits > 0, other firms will enter the market --Leads to an increase in supply --Puts downward pressure on prices --Price falls towards ATC and reduces profits to break even point -If profits < 0, firms will exit the market --Leads to a decrease in supply --Puts upward pressure on prices --Prices rise and profits increase -When Profits = 0, no incentive for firms to enter or exit THEREFORE, in the Long-Run: P = AC = MC

Profit Maximization for PC Markets

-Under PC: MR = Price ---the MR curve shows how MR varies as output varies -Average Revenue (AR): revenue per unit of output --AR = TR/Q = (P*Q)/Q = P --AR = Price --Under PC: AR = MR = P - A price-taking firm's profit is maximized by producing the quantity of output at which the mC of the last unit produced is equal to the market price.

Free entry and exit insure:

-the number of producers in an industry can adjust to changing market conditions and; -producers in an industry cannot artificially keep other firms out

Two key conditions for Perfect Competition

1. For an industry to be PC, it must contain many producers, none of whom have a large market share -a producer's market share is the fraction of the total industry output accounted for by that producer's output 2. An industry can be PC only if consumers regard the products of all producers as equivalent -homogenous product (standardized product) the consumers regard the product of different producers as the same good

PC Markets in the Short-Run

1. Production Decision: --produce quantity where Price (MR) = MC --Profit maximizing condition for a PC firm: P = MC 2. Shutdown Decision: --Shutdown if Price < Average Variable Cost --P<AVC --Fixed inputs cannot be changed in the Short-Run

PC Markets in the Long-Run

1. Production Design: -Produce quantity where Price (MR) = MC -Profit maximizing condition for a PC firm: P = MC 2. Shutdown Decision: -All costs are avoidable in the long-run -Shutdown if Price < ATC

Marginal Cost

Change in TC divided by the change in quantity of output = change in TC generated by producing an additional unit of output

Marginal Revenue

Change in TR divided by the change in quantity = change in TR generated by selling an additional unit of output

Shutdown Decision

If TR > TC, the firm is profitable If TR = TC, the firm breaks even If TR < TC, the firm incurs a loss

Firm should shutdown if...

Long-run: TR < TC Short-run: TR < VC

Total Revenue

Price * Quantity The amt of income received from all units sold

Short-Run Summary Profitability:

Profits: (P-ATC)*Q If P > ATC, the firm is profitable If P = ATC, the firms breaks even If P < ATC, the firm incurs a loss Firm should shutdown if: P < Minimum AVC Profit maximizing level of output: -if produce, maximize profits where MR = P = MC

Profit Maximizing Condition

Stop producing where MR=MC -In order to maximize profits, a firm should continue to produce as long as the additional revenue from an additional unit of output is greater than the additional cost from an additional unit of output -Keep producing as long as MR > MC -Profits are maximized by producing the quantity at which the MC of the last unit produced is equal to its MR

Total Cost

The total cost of producing a given quantity of output

Free entry and exit

This happens when new producers can easily enter into or leave that industry

Long-Run Market Equilibrium

This happens when the QS equals the QD, given that sufficient time has elapsed for entry into and exit from the industry to occur

Profit

Total Revenue - Total Cost

Price-taking consumer

a consumer whose actions have no effect on the market price of the good he or she buys

Perfectly competitive market

a market in which all market participants are price-takers

Price-taking producer

a producer whose actions have no effect on the market price of the good it sells

Perfectly competitive industry

an industry in which producers are price-takers