Understanding Perfect Competition and Profit Maximization

Perfect Competition

Many buyers and sellers, each with a small market share.

Market Share

Fraction of the total industry output accounted for by that producer's output.

Price Takers

Both buyers' and sellers' actions have no effect on price.

Standardized Product

Customers regard different sellers' products as equivalent.

Free entry and exit

New producers can easily enter into an industry and existing producers can easily leave that industry.

Profit

Total Revenue - Total Opportunity Cost

Profit Formula

Profit = p * abc

Total Revenue Formula

Total Revenue = paqO

Total Cost Formula

Total Cost = cbq*O

How to Maximize Profit

Marginal Revenue = Marginal Benefit

Marginal Benefit

ᅀTotal Revenue/ᅀQproduced

Average Revenue

Marginal Revenue = Price

Sunk Cost

Cost that has already been committed and cannot be recovered.

Short Run Supply Curve Condition

Supply = 0 when price is p'.

Market Supply

Qs by all the firms in the market.

Long-Run Price Behavior

Firms may bid up the price of an input.

Long-Run Supply Curve

More elastic than short-run.

Entry and Exit Effects

Higher price attracts new entrants in the LR, raising industry Q and lowering P.