Chapter 12: Perfect Competition

1. Standardized Product
2. Many buyers & sellers
3. No barriers to new firms
entering the market
4. Full information

Chapter 12: Perfect Competition

Perfectly competitive market
no individual supplier has
significant influence on the
price of the product firms
are price takers

The Goal: Maximum Profit!

The firm objective: profit maximization.
Profits=Revenue-Cost=P*q-TC(q)

Profit Maximization in Perfect

Competition
Two methods to find the optimal output:
1. Calculate Profit at every possible point
2. Set MC=MR=P Find q*
Where MR (marginal revenue) is the change in total
revenue from selling one more unit of a product.

Profit Maximization in Perfect

Competition
Note: Maximum profit positive economic profit.
>0 IFF P(q*)>ATC(q*)
Why do firms ever produce at a loss?

Supply in Perfect Competition

The supply curve of the perfectly competitive firm is
the MC curve.
In the short run: The MC curve above min AVC
In the long run: The MC curve above min ATC
Shutdown point: the minimum point on the firms
average variable cost curve; if the price falls below
this point, the firm shuts down production in the short
run.

Entry and Exit

New firms enter an industry in which
existing firms earn an economic profit.
Firms exit an industry in which they incur
an economic loss.
Long run profits= zero

Supply in Perfect Competition

What shifts Supply?
Technology
Input prices
Number of suppliers
(Changes in prices of other products)

Perfect competition and efficiency

The forces of competition will drive the market to be:
1. Productive efficient
2. Allocative efficient

Competition and Efficiency

The quantity Q* and price P* are the competitive
equilibrium values.
So competitive equilibrium is efficient.

The consumer gains the

consumer surplus,
and the producer gains the
producer surplus.