Perfect Competition

Perfect Competition

A market structure characterized by many sellers and buyers, identical products, perfect information, and no barriers to entry or exit.

Price Takers

Firms that must accept the market price for their product and cannot influence it.

Allocative Efficiency

Occurs when a firm produces the quantity where Marginal Benefit (MB) equals Marginal Cost (MC), and price reflects the good's marginal benefit.

Productive Efficiency

Occurs when a firm produces the quantity where Average Total Cost (ATC) is minimized.

Economic Profit

When a firm's marginal cost (MC) equals marginal revenue (MR) and is above the average total cost (ATC) at that quantity.

Long-Run Supply Curve (LRSC) in Constant Cost Industry

Remains horizontal as demand increases and firms enter the market without changing input prices.

Increasing-Cost Industry

An industry where increasing demand for inputs raises input prices, causing an upward-sloping Long-Run Supply Curve.

Decreasing-Cost Industry

An industry where technological advancement and bulk buying reduce costs, leading to a downward-sloping Long-Run Supply Curve.

Economic Profit in Long-Run Equilibrium

Typically zero; new entrants in a perfectly competitive market keep economic profits at zero due to ease of entry and exit.

Marginal Cost (MC)

The additional cost incurred from producing one more unit of a good.

Average Total Cost (ATC)

Total cost divided by the quantity of output produced; reflects the per-unit cost of production.

Short-Run Profit Conditions

Firms can earn economic profits in the short run as long as MC = MR and the price is above ATC.

Entry and Exit in Perfect Competition

New firms enter when existing firms are making profits, and exit occurs when firms incur losses.

Market Power

The ability of a firm to influence the price of a good; typically absent in perfect competition.