Firm Behavior and Efficiency in Pure Competition

Profit Maximization

Firms aim to maximize profits and minimize losses.

Free Entry and Exit

No restrictions for firms entering or leaving the market.

Long-Run Equilibrium

Condition where MR = MC and price equals minimum ATC.

Economic Profit

Zero economic profit occurs in long-run equilibrium.

Market Supply Increase

More firms entering raises overall market supply.

Long-Run Supply Curve

Price remains constant; output adjusts with demand.

Constant-Cost Industry

Entry/exit does not affect market prices.

Increasing-Cost Industry

Expansion raises input prices, creating upward supply curve.

Decreasing-Cost Industry

Expansion lowers costs, leading to downward supply curve.

Productive Efficiency

Goods produced at the lowest possible cost.

Allocative Efficiency

Price equals marginal cost, maximizing resource allocation.

Consumer Surplus

Difference between maximum price consumers pay and actual price.

Producer Surplus

Difference between minimum price producers accept and received price.

Normal Profit

In long run, firms earn zero economic profit.

Supernormal Profit

Short-run profit occurs when MR exceeds ATC.

Market Adjustments

Entry/exit of firms adjusts prices and quantities.

Homogeneous Products

Identical products offered by all firms in market.

Price Takers

Firms accept market price; cannot influence it.

Perfect Information

Complete knowledge of prices and market conditions exists.

Optimal Resource Allocation

Resources allocated efficiently, maximizing total economic surplus.

Short-Run Losses

Firms exit market when MR is below ATC.

Total Surplus Maximization

Perfect competition leads to no deadweight loss.