AP Econ. : Perfect Competition FRQ

Conditions for Perfect Competition

I. Many producers each w. small market share

II. Firms producing a standardized product

Profit-maximizing Rule/Optimal Output Rule

Market Price EQUALS Marginal Cost

When is a firm profitable?

Depends on whether a market price of tomatoes is MORE or LESS than the farm’s minimum average total cost 

I. If the firm produces a quantity at which P>ATC, the firm is profitable

II. If the firm produces a quantity at which P = ATC, the firm breaks even 

III. If the firm produces a quantity at which P<ATC, the firm incurs a loss

Profit FROM perfect competition curve 

P= TR- TC= (TR/Q-TC/Q)*Q

Economic Profit = (Price Average - Total Cost) * Q

Price is set FROM the…

supply/demand OR market curves 

To find profits or losses,

LOOK AT AREA BETWEEN THE POINT ON THE ALIGNING POINTS OF THE MC AND ATC CURVE

If the ATC is BELOW the price line, look for profits

If the ATC is ABOVE the price line, look for the losses

At the price line,

P = D = MR

Net gain

MR-MC

Break-even price

The minimum ATC of a price-firm, earns 0 profit

Short-run production + Shut-down price

How an individual firm’s profit maximal level of output depends on  market price, depending on fixed costs 

Shut-down price

Equal to minimum average variable cost, cease product if MP falls below

(If MP is greater or equal to, firm should continue to produce) 

Short-Run Firm’s Supply Curve

Shows how an individual firm’s profit maximizing level of output depends on market price, taking the fixed cost as given

Long-Run production

Price below the break-even pointing the long run will lead for firm exit and price above the break-even point will lead to firm entry

Industry Supply Curve

Shows the relationship between the price of a good and the total output of the industry as a whole

Short Run Industry Supply Curve

Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms

Long Market Equilibrium

Regresses and Revives until firm breaks-even 

Efficiency in the Long Run

Firms producing as much as it can at the lowest price it can to MAXIMIZE benefits to customers = P will equal marginal cost = Allocative Efficiency

Firms earn zero economic = P equals minimum ATC = Productive Efficiency 

Total Fixed Cost

(ATC-AVC) * Q

In perfectly competitive markets,

sellers will only be able to sell at market price, as consumers would go to another company other wise

ATC shifts up when..

price increases

Remember to address firms entering the industry when prices ———-

increase

To determine profits on an ATC curve in the long-run,

use area under the curve

WHEN PRICE INCREASES

leave ATC curve where it is, MC is new quantity demanded

Distance between MC and ATC is the

profit/loss

AGAIN above is loss, below is profit