Perfect Competition

Perfect competition (definition & conditions)

when firms are making decisions in a competition-induced vacuum because there are many buyers and sellers, the products are all identical, and there are no barriers to exit/entry

Demand in perfect competition

perfectly elastic (if you charge more, no one buys, and if you charge less, everyone mimics prices and you have same # customers but less money)

marginal revenue

change in TR/change in Q

In perfect competition, the following are all equal:

P global = P individual = D = MR

Profit-maximizing quantity of output

where profit is highest, MR = MC (max profit/minimized loss)

What determines how much profit or loss occurs? Why?

ATC, because profit = TR - TC = (P x Q) - (Q x ATC) = Q(P - ATC)

profit rectangle: height & length

P - ATC, Q

What determines shut down decision?

AVC

3 situations when looking at AVC

TR > TC > VC/P > ATC > AVC (stay open), TC > TR > VC/ATC > P > AVC (operate in short run, exit in long run), TC > VC > TR/ATC > AVC > P (shut down now)

When does entry happen? What are its consequences?

Profit > 0, competitors enter, price decreases for everyone, profit decreases until profit = 0

When does exit happen? What are its consequences?

Profit < 0, competitors exit, price increases for everyone, profit increases until profit = 0