Firm Behavior in Pure Competition
Firms seek profits and avoid losses.
Free entry and exit in a purely competitive industry.
Long-Run Equilibrium
In long-run equilibrium, MR = MC and price = minimum ATC ($50).
Economic profit is zero in this state.
Market Supply and Industry Entry
As firms enter, market supply increases.
Long-run supply curve: Price remains constant, output adjusts.
Industry Types
Constant-cost industry: Entry/exit has no effect on prices.
Increasing-cost industry: Expansion raises input prices (upward-sloping supply curve).
Decreasing-cost industry: Expansion lowers costs (downward-sloping supply curve).
Efficiency in Pure Competition
Productive efficiency: Goods produced at the lowest cost.
Allocative efficiency: P = MC, resources allocated to products most wanted by society.
Consumer & Producer Surplus
Consumer surplus: Difference between the max price consumers will pay vs. what they actually pay.
Producer surplus: Difference between the minimum price producers accept vs. what they receive.
Entry and Exit Effects in the Long Run
Firms enter if profit exists.
Firms exit if losses occur.
In the long run, all firms break even (normal profit).
Perfect competition is highly efficient: P = MC = minimum ATC.
Industry Adjustments in the Short Run
If firms earn supernormal profit, new firms enter → price decreases, quantity increases.
If firms experience losses, firms exit → price increases, quantity decreases.
Long-Run Industry Adjustments
Constant-cost industry: Long-run supply is horizontal.
Increasing-cost industry: Supply curve is upward sloping.
Decreasing-cost industry: New entrants lower costs for existing firms (downward-sloping long-run supply curve).
Characteristics of Perfect Competition:
Homogeneous Products: All firms offer identical products, making them perfect substitutes.
Price Takers: Individual firms cannot influence market prices; they accept the prevailing market price.
Perfect Information: Both buyers and sellers have complete knowledge of prices, technology, and market conditions.
Implications of Perfect Competition:
Optimal Resource Allocation: Resources are allocated efficiently, maximizing total surplus in the economy.
Economic Profits: In the long run, firms earn zero economic profit, covering only their opportunity costs.
Market Dynamics: The absence of barriers ensures that firms can freely enter or exit the market in response to economic incentives.
Graph Features:
MC (Marginal Cost), ATC (Average Total Cost), and MR (Marginal Revenue = Price) curves
MR = MC = minimum ATC at the equilibrium point
Firms make zero economic profit (normal profit)
📌 Key Insight: In the long run, price settles at the lowest ATC, ensuring productive and allocative efficiency (P = MC).
Different industry cost structures affect the long-run supply curve:
Constant-Cost Industry:
Graph: A horizontal long-run supply curve
Meaning: Entry/exit does not affect resource prices, so supply adjusts without price changes.
Increasing-Cost Industry:
Graph: An upward-sloping long-run supply curve
Meaning: As new firms enter, resource prices rise, causing higher costs and prices.
Decreasing-Cost Industry:
Graph: A downward-sloping long-run supply curve
Meaning: Expansion leads to lower costs, benefiting all firms in the industry.
📌 Key Insight: Industry behavior in the long run depends on how costs change as firms enter or exit.
Supernormal Profit (Short-run positive economic profit):
Graph:
The MR (Price) curve is above ATC, meaning firms earn a profit.
More firms enter, shifting supply right, lowering price.
Result: Market adjusts until normal profit remains.
Losses in the Short Run:
Graph:
The MR (Price) curve is below ATC, meaning firms incur losses.
Some firms exit, shifting supply left, raising price.
Result: Firms exit until normal profit is restored.
📌 Key Insight: The market corrects profits and losses by adjusting firm entry/exit.
Graph:
Demand and supply curves intersect at equilibrium.
Consumer surplus: Area above price and below the demand curve.
Producer surplus: Area below price and above the supply curve.
📌 Key Insight: Perfect competition maximizes total surplus, meaning no deadweight loss.