PERFECT COMPETITION 4 CONDITIONS Many buyers and sellers

PERFECT COMPETITION

4 CONDITIONS Many buyers and sellers Identical products Buyers and sellers are well informed about products Sellers enter and exit market freely

PERFECT COMPETITION 1. Require many buyers and sellers. No one can be powerful enough to buy or sell goods to change total market Q or market P. 2. The products of all firms are the same (homogenous) – there exist no difference between one firms output and the next. Commodity 3. Information about prices and products is freely available to all firms – “firms are price takers” 4. Firms can enter or exit freely. More firms=more competition=lower prices

PERFECT COMPETITION Demand for the firm Each perfectly competitive firm produces a standardized (homogenous) product Because each firms output is such a small share of total market supply, the demand for each firms output is perfectly elastic Perfectly competitive firms have no effect on the market price, they produce as much as they can at the going price

PERFECT COMPETITION All units are sold for the same price, so each unit adds the same amount to total revenue, therefore MR =P HORIZONTAL DEMAND CURVE for the firm

PERFECT COMPETITION � DRAW market and firm

PERFECT COMPETITION Profit maximization Maximize profit when MR = MC Remember: Marginal analysis was MB = MC MR>MC produce MR<MC don’t produce

REFRESHER 1. Where is the profit maximizing position? 2. What are firms called in a perfectly competitive market? 3. What is the elasticity of demand of a firm in a P. C. market? 4. What are the 4 conditions to be considered perfectly competitive?

PERFECT COMPETITION Short Run Profit / Loss Per unit Profit = P - ATC P=ATC, Profit = 0 P>ATC, Profit >0 P<ATC, profit <0

PERFECT COMPETITION Short Run Shut Down Firms has to pay fixed costs (but incurs those cost anyway, regardless of output) In short run as long as you cover your VC, you should stay in business So as long as P >= AVC Shut Down If P < AVC DRAW

PERFECT COMPETITION P>ATC – positive profit P>AVC – stay in business

PERFECT COMPETITION P = ATC – zero profit – BREAKEVEN POINT P>AVC – stay in business

PERFECT COMPETITION P<ATC – negative profit P>AVC – stay in business Would produce here and hope to do better in near future Need to cut costs or gain higher price from market

PERFECT COMPETITION P<ATC – negative profit P=AVC – Shut down point Just barely covering variable costs

PERFECT COMPETITION P<ATC – negative profit P<AVC – SHUT DOWN! Not covering variable costs

PERFECT COMPETITION Long Run Adjustment In the long run Perfectly Competitive firms will always be in equilibrium P = ATC = MR = MC