Perfect Competition

characteristics of perfect competition

many buyers and sellers, identical products, no barriers to new firms entering/exiting the market, no externalities, perfect information

price takers

unable to affect the market price because firms are tiny relative to the market and sell exactly the same product as everyone else

perfectly competitive firm demand curve

perfectly elastic; D = P = AR = MR

profit

TR - TC

positive profit

TR > TC

loss

TR < TC

break-even (zero economic profit)

TR = TC

economic profit

implicit cost + explicit cost

accounting profit

explicit cost

profit maximization

MR = MC

total revenue

Q* x P*

total cost

P_ATC x Q*

shut down

done when a firm is generating losses in the short term (TR < AVC)

where are all the decisions to produce in the long run?

P > AVC

Perfectly Competitive Long Run Equilibrium

entry or exit of firms has resulted in the perfectly competitive firms breaking even

productive efficiency

production at the lowest possible cost

allocative efficiency

state of the economy in which production represents consumer preferences — MB = MC

perfectly competitive firms’ efficiency

allocative and productive