Module 10: Markets: Perfect Competition

price-taker

no one has the market ability to influence the market price for a good or service.

Profit Maximizing Condition for a perfectly competitive firm

MR = MC

or

P = MC

Economic Profit

Economic Profit = (Price - ATC) * Quantity

When is Production Profitable

• If TR > TC, the firm is profitable.

• If TR = TC, the firm breaks even.

• If TR < TC, the firm incurs a loss.

Marginal Revenue & Marginal Cost

MR = change in TR / change in Q
MC = change in TC / change in Q

Calculating Profits

Shut Down Rule

Firms Shut Down if losses from staying open > Losses of shutting down

P < ATC then profits are negative

profit = Q * (P-AVC) - FC

if P-AVC > 0 then the firm continues to operate

Firm Entry Decision in Long Run

Firms see positive profits, and enter, which increases Market Supply

• Market supply increase will decrease the equilibrium market price (P*)

Firm Exit Decisions

Now assume, P < ATC, then we know Profits <0

• Firms have negative profits and exit, which Decreases Market Supply

• Market Supply Decreases will Increase the Equilibrium Market Price (P*)

• This process continues to happen until P* = MC and Profits =0

Long Run Equilibrium