pure competition

characteristics of pure competition

• very large no. of firms

• homogenous/identical product

• very easy entry

• no non-price competition

• no control over the price of the product 

• price takers

give an example of pure competition

agriculture produce

AR =

TR/Q

TR =

P x Q

MR =

ΔTR/ΔQ or P

TR on the graph is…

a straight line that slopes upward

how is the firm’s demand curve

horizontal and perfectly elastic (D=AR=MR)

when is TR = TC

when two curves intersect (break-even point)

normal profit =

break-even point

when does maximum profit occur

where the vertical distance between TR and TC is greatest

what is are important features of MR = MC rule

• decide if the firm should increase or decrease production

• if the firm should operate while making a loss

• under what conditions should the firm shut down

when will the firm make economic profit 

price > ATC

when will the firm make normal profit

price = ATC

when will the firm make an economic loss but can still produce

price > AVC and price < ATC

when will the firm shut down

price < AVC

what does the supply curve show

the relationship between price and quantity

where is the supply curve

the upward slope of the MC curve above AVC

what happens when a firm is enjoying economic profit

• signals other firms to enter the market

• supply shifts to the right

• new equilibrium reached

• firm is now making normal profit

what happens when demand increases in the LR

• demand curve industry shifts to the right 

• new equilibrium 

• increase in the price filters to the firm 

• firms now experience economic profit 

• profit sends signal to other firms to enter 

• supply curve shifts to the right 

• new equilibrium is reached 

what happens when demand decreases

• demand curve industry shifts to the left 

• new equilibrium 

• decrease in the price filters to the firm 

• firms now experience economic loss

• losses sends signal for other firms to leave

• supply curve shifts to the left

• new equilibrium is reached 

how is the long run supply curve for a constant industry

horizontal or perfectly elastic

when is the firm allocative efficient

P = MC (always)

when is the firm productive efficient 

• P = min ATC

• in the LR 

• making normal profit in SR

how is consumer surplus and producer surplus in PC industry

they are maximised