Perfect Competition

Intro to Perfect Competiton

• many sellers and buyers

• Identical products/services sold

• every seller and buyers knows what is being sold within the market (”perfect information”)

• no barriers to entry/exit

• price takers — follow the market price

• firms graph: MR = D = AR = P (straight/horizontal)

• market power: the ability to control the price of a good

Economic Profit for Firms

• when MC = MR, above ATC, it’s undergoing an economic profit

• when MC = MR, where MC intersects w/ ATCs minimum point, there is no economic profit

• when MC = MR, below ATC, it’s suffering an economic loss

Long-Run for Firms

• economic profit

  • more entrance → increase in supply → decrease in quantity & economic profit

• LRSC in constant cost

  • increase in demand → higher MR & increase in economic profit

  • however firms in the LR typically never make economic profit because of more entry/exist

• LRS when industry costs arent constant

  • in the long run, industry input prices can change as the industry expands

  • Increasing-Cost Industry

    • input demand rises → input prices rise → causes the LRS curve to slope upward

    • MC & ATC curve shift up

    • firms still enter when there’s profit, but the entry raises costs, limiting how many can enter

    • Example: Oil, mining (resource-intensive industries).

  • Decreasing-Cost Industry

    • industry growth → better tech, bulk buying, labor specialization → LRSC slopes downward

    • MC & ATC curve shift down

    • entry of new firms helps reduce costs

    • Example: Tech, electronics

Efficiency

• allocatively efficient in the short run; both allocatively efficient and productively efficient in the long run

• allocative efficiency occurs when a firm produces the quantity where MB = MC

• a perfectly competitive firm always produces the allocatively efficient quantity because the good's price reflects its marginal benefit, and a perfectly competitive firm always produces where P=MR=MC

• productive efficiency occurs when a firm produces the quantity where average total cost is minimized, and a perfectly competitive firm produces this quantity in the long run