module 9 - perfect competition

price takers

an individual or firm that has no control over the market price of the good or service they sell (or buy)

• they must accept the circumstances and their actions don’t change much in the grand scheme

market price

price at which is a good, service, or asset is currently being bought and sold in an open market

• consumers are willing to pay for it and accepting it

how prices are found in perfect competition

they are found by the impersonal forces of market supply and demand

how prices change in perfect competition

they’re dynamic and constant adjust in response to changes in market conditions

• such as demand change

graph of 0 profit

graph of positive profit

graph of negative profit

shutdown conditions in the long run

simpler and absolute

• price is less than average total cost (ATC)

• total revenue (TR) is less than total cost (TC)

shutdown conditions in the short run

based on whether it can cover its variable costs

• price is less than average variable cost (AVC)

• total revenue (TR) is less than total variable cost (TVC)

• this is because they need to cover their fixed costs, and if they can’t, they need to shut down

short run profit

firms’ decision on how much to produce at the given market price

• price = marginal revenue (MR)

• the individual firm is a price taker

long run profit

firms earn zero economic profit (normal profit)

• total revenue is just enough to cover all its explicit and implicit costs