Module 10: Perfect Competition

Assumptions about PC

many buyers and sellers, homogeneous products, perfect information, free entry and exit, firms are price takers because each firm is tiny compared to the market, D=P=MR=AR

Profit Maximizing Q and Profit Maximizing Price

Q: where MC=MR, Price: where MC=MR, draw line up to D curve

Profit equation and where it occurs

Profit=TR-TC, occurs when P>ATC at profit maximizing Q

Economic Loss occurs when

ATC > P > AVC—firm loses money but still covers VC, or P<ATC

Zero economic profit when

P=min ATC, firms cover all OCs/reach normal profit, long-run equilibrium

Short vs. Long Run

Short Run: firms can’t exit immediately, they must decide whether to produce or shut down. Long Run: firms can exit and enter

When to produce vs shut down in the short run

Produce if P>=AVC, shut down if P<AVC

when should firms enter and exit in the long run

exit if P<ATC, enter if P>ATC

short run supply

MC is above AVC

short run efficiency, allocative and productive

allocative: P=MC, no DWL, society gets right amount. Productive: produce at lowest possible MC given fixed inputs. TS is maximized

long-run equilibrium

P=MC, P=min ATC, 0 EP, Efficient