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    Perfect Competition - 3.7

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    parminderpcs

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    Perfect Competition - 3.7

    Uploaded by

    parminderpcs
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    Perfect Competition- 3.7

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    3 views24 pages

    Perfect Competition - 3.7

    Uploaded by

    parminderpcs

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    © All Rights Reserved
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    Perfect Competition

    3.7
    Perfectly Competitive Firm

    1. There are many buyers and sellers


    2. Firms are “price-takers” which means they take the market
    price as given. Firms have no control over price
    3. The goods offered by the firms are identical (wheat)
    4. There are no barriers to entry. (firms can freely enter or exit
    the market)
    5. The long-run supply curve for the industry is perfectly
    elastic- firms can supply as all of their output at a constant
    price determined in the market
    Perfectly Competitive Firm Graph
    Price MC

    P D=MR=AR (MR DARP)


    Notice that Price=MC, so
    allocative efficiency is achieved
    What happens if the firm
    produces where MR<MC?
    MR>MC?
    q
    Quantity
    Perfectly Competitive Firm Graph
    Earning Economic Profit

    • Price is greater than ATC,


    therefore the firm is earning
    ATC economic profit. (TR>TC)
    AVC • To find the area of profit, stay
    on the quantity line and go
    down from price to ATC.
    From Short-Run to Long-Run
    • If the firm is operating in a constant-cost industry,
    then entry and exit of firms does not change ATC
    • An example would be if you had unlimited workers, so
    when a new business opened it wouldn’t affect the
    ATC for each firm.
    • When firms earn economic profit, there is incentive
    for other firms to enter the market. This shifts the
    supply in the market to the right which lowers the
    price until P=ATC
    From Short-Run to Long-Run
    • Increasing cost industry- if firms
    enter due to the existence of profit,
    then the ATC increases.
    • This is due to firms competing for
    resources
    • The increase in supply causes the
    price to decrease in the market
    • Ex- you work at a pizza restaurant
    and a new pizza place opens next
    door. The owner of the new place
    offers you a raise to come work for
    Perfectly Competitive Firm at a Loss

    • Price is less than ATC, so the


    ATC firm is earning an economic
    loss
    AVC • Since Price>AVC the firm
    continues to operate in the
    short-run
    • To find the loss, stay on the
    quantity and find ATC
    From Short-Run to Long-Run
    • If the firm is operating in a constant-
    cost industry, then entry and exit of
    firms does not change ATC
    • If firms are at a loss, some firms will
    exit the market. This causes the supply
    to decrease, which raises the price
    until P=ATC.
    From Short-Run to Long-Run
    • If the firm is operating in an increasing cost industry,
    as firms exit the marketplace, the LATC would
    decrease.
    • This is due to the fact that there would be less firms
    competing for resources
    • In this case, the price would increase due to a
    decrease in supply, and the ATC would decrease.
    Perfectly Competitive Firm in the Long-
    Run
    • Price = ATC, so the firm is
    earning 0 economic profit
    ATC
    • Firms in long-run equilibrium
    earn 0 economic profit (Normal
    profit)
    • This means the firm is
    allocatively efficient (P=MC)
    • It also means the firm is
    productively efficient (ATC is at
    a minimum)
    Increasing Cost, Decreasing Cost, and
    Constant Cost Industries
    • Increasing Cost Industry- as the output in the industry increases,
    the LATC increases. (Firms fighting over resources)
    • Decreasing Cost Industry- as the output in the industry increases,
    the LATC decreases (As more firms enter the input costs start
    decreasing)
    • Constant Cost Industry- as the output in the industry increases,
    the LATC is constant. New firms entering don’t have any affect on
    input costs.
    Device and Internet Access

    We know that not all students have access to the internet or a


    device. We’re working on solutions to help students get what they
    need to show their best work. If you need mobile tools or
    connectivity or know someone who does, you can reach us
    directly to let us know.

    cb.org/tech

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