Perfect Competition Notes
Perfect Competition
What’s a Perfectly Competitive Market?
It's a market where lots of companies sell the same stuff.
There are no barriers to getting in or out for businesses.
Older companies don’t have special perks that let them do better than new ones.
Everyone knows what's going on with prices.
How Does Perfect Competition Happen?
Minimum Efficient Scale: This means the smallest size a company can be to keep costs down, and in perfect competition, this size is pretty small compared to how much people want to buy.
Price Takers: These companies have to just accept the market price because they’re usually small potatoes.
Making Money in Perfect Competition
Chasing Profit: Companies want to make as much money as they can, which is basically:
Profit = Total Revenue - Total Costs
Where:
Total Revenue = Price times Quantity
Total Costs includes all expenses.
Marginal Revenue (MR): This is how much extra money a company makes from selling one more unit:
MR = Change in Total Revenue / Change in Quantity
In perfect competition, MR equals Price, meaning the company can sell as much as it wants at the market price.
Deciding What to Produce
Companies need to figure out:
How to make stuff: Do it cheaply.
How much to produce: They want to produce where MR (which is also the same as demand and price) equals Marginal Cost.
Joining or Leaving the Market: Look at what it takes to join or leave the market.
Shutting Down
Companies might think about shutting down if:
Their costs of variable stuff (like labor or materials) are more than what they earn.
Their average costs for variable stuff exceed the market price.
Shutdown Point: This is where the average variable cost curve is at its lowest.
Supply Curve
A company’s supply curve comes from combining the Marginal Cost and Average Variable Cost curves.
What Happens in the Short Run?
Short-Term Supply Curve: Shows the total amount companies can supply at different prices.
Short-Run Equilibrium: This happens when what people want to buy equals what companies supply.
Calculating Short-Term Profit: Profit per item = Market Price - Average Total Cost, and Total Profit = (Market Price - Average Total Cost) times Quantity.
Long-Term Choices
Over the long haul, companies can enter or leave the market:
New companies pop in when others are making consistent profits.
Companies leave when they’re losing money all the time.
Long-Run Equilibrium: This is when there are no more economic profits or losses; businesses stop coming and going.
Tech and Market Changes
New Technologies:
Can boost consumer demand by making things more appealing.
Lower production costs, which helps companies provide more supply.
How Efficient is Perfect Competition?
Resource Efficiency: Happens when the cost to society of making something equals the benefit it gives to society.
Equilibrium Condition: At competitive equilibrium, the price consumers pay equals the social benefit and the cost equals the social cost.
Wrap Up on Competition and Efficiency
In a perfectly competitive market, the price and quantity match up perfectly for the best resource use.
Both sellers and buyers are getting the most out of it, meaning what people want equals the benefit to society, and what companies supply is balanced out with the costs.