Perfect Competition in the Short Run

perfect competition

the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product

Monopoly

A market in which there are many buyers but only one seller.

Oligopoly

A market structure in which a few large firms dominate a market

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

MR

change in TR/change in Q, will be constant for a perfectly competitive firm

MR = MC rule

The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.

Shutdown Rule (short run)

P < min AVC

MR. DARP

In a perfectly competitive market:

Marginal Revenue = Demand = Average Revenue = Price

Entry Barriers

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential

standardized product

a product that consumers consider identical in all essential features to other products in the same market

Price-takers

have no ability to affect the price of a good in a market.

perfectly elastic demand curve

a horizontal line reflecting a situation in which any price increase reduces quantity demanded to zero; the elasticity has an absolute value of infinity

Industry short run supply curve

Aggregate of all individual firm's MC curve above the AVC curve

total revenue

Price x Quantity

Profit Maximizing Rule

All firms maximize profit by producing where MR = MC

MR=MC= Min. AVC

Short Run Shutdown Point

MR > MC

Firms are not yet profit maximizing and should produce more

MR < MC

Firms are not profit maximizing and should produce less

ATC > MR = MC > AVC

In the short run, Firms should operate to minimize losses

Long Run Equilibrium in Perfect Competition

-P=MC=Minimum ATC

-Accounting profit may be positive

-Economic profit is zero

Allocative efficiency

a good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it, aka P=MC

Productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output where min ATC

constant-cost industry

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

increasing-cost industry

an industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs

decreasing-cost industry

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

economic profit

total revenue minus total cost, including both explicit and implicit costs

normal profit

Economic break even point, zero economic profit but positive accounting profit with all implicit costs covered.

AVC

Average variable cost (VC/Q)

AFC

Average fixed cost (FC/Q)

ATC

Average total cost (TC/Q)

MC

change in TC/change in Q