Post on 29-Dec-2015
In a Perfectly Competitive In a Perfectly Competitive Market, the firm is a Price Market, the firm is a Price
TakerTaker
Maximizing Profit in Pure Maximizing Profit in Pure CompetitionCompetition
Profit maximum occursProfit maximum occurs
When total revenue exceeds total When total revenue exceeds total costscosts
by the greatest amountby the greatest amount
This occurs where the slopes of total This occurs where the slopes of total cost and total revenuecost and total revenue
are equalare equal
Profit Maximum in Perfect Profit Maximum in Perfect CompetitionCompetition
Equivalent to finding equal slopes for Equivalent to finding equal slopes for TR & TCTR & TC
MR = MCMR = MC
For a firm in a perfectly competitive For a firm in a perfectly competitive marketmarket
MR = PMR = P
thereforetherefore
MR = P = MCMR = P = MC
Short-run v. Long-run Short-run v. Long-run Economic ProfitEconomic Profit
Firms maximize short-run economic Firms maximize short-run economic profitprofit
In the long run, existence of short-run In the long run, existence of short-run profitsprofits
attract new market entrants, i.e., more attract new market entrants, i.e., more competitorscompetitors
driving down pricesdriving down prices
ensuring zero long-run economic profitensuring zero long-run economic profit
Chapter 23 Figure 23.7(a)
Short-run Competitive Short-run Competitive EquilibriumEquilibriumfor the Firmfor the Firm
Chapter 23 Figure 23.7(b)
Short-run Competitive Short-run Competitive Equilibrium for the Industry Equilibrium for the Industry
and the Marketand the Market
Chapter 23 Table 23.8
The Perfectly Competitive The Perfectly Competitive Firm’sFirm’s
Output DecisionOutput Decision
Chapter 23 Figure 23.10
Long-run Supply is Perfectly Long-run Supply is Perfectly Elastic for a Constant-cost Elastic for a Constant-cost
IndustryIndustry
Chapter 23 Figure 23.11Long-run Supply forLong-run Supply for
an Increasing-cost Industryan Increasing-cost Industry
Chapter 23 Figure 23.12Long-run Equilibrium for a Long-run Equilibrium for a
Perfectly Competitive FirmPerfectly Competitive Firm
Efficiency and PureEfficiency and Pure CompetitionCompetition
Productive EfficiencyProductive EfficiencyP = Min ATCP = Min ATC
Allocative EfficiencyAllocative EfficiencyP = MCP = MC
Underallocation implied by P > MCUnderallocation implied by P > MC
Overallocation implied by P < MCOverallocation implied by P < MC
Consumer SurplusConsumer SurplusPerfect Competition Divides Surplus Perfect Competition Divides Surplus Value (Subjective)Value (Subjective)
more or less equally between more or less equally between Consumers and ProducersConsumers and Producers
Provides Maximum Consumer SurplusProvides Maximum Consumer Surplus
consistent with keeping the good in consistent with keeping the good in productionproduction