PERFECT COMPETITION Characteristics of Perfect Compeition Price taking

PERFECT COMPETITION

Characteristics of Perfect Compeition • Price taking firms – meaning they take the market price for their goods they do not set prices • LOTS of competitors • Identical (standarized) products • Free entry and exit in the long run • Zero economic profit in the long run https: //www. investopedia. co m/terms/p/perfectcompetitio n. asp

Demand curve is Horizontal Price is $7 – market price • Firm cannot charge more because consumers would go elsewhere • Firm WILL not charge 6 – they can charge $7 and at $6 they would be giving away revenue

Calculate TR Total Revenue = Price x Quantity 1 X 7 = $7 2 x 7 = $14 Quantity Price Total Revenue 0 $7 1 $7 $7 2 $7 $14 3 $7 4 $7 5 $7 6 $7 Marginal Revenue Average Revenue

Marginal Revenue = change in total revenue change in quantity $7 = $7 1 Notice total revenue always increases by $7 as Quantity always changes by 1 Quantity Price Total Revenue 0 $7 0 1 $7 $7 2 $7 $14 3 $7 $21 4 $7 $28 5 $7 $35 6 $7 $42 Marginal Revenue $7 Average Revenue

Average Revenue = total revenue quantity 7=7 1 14 = $7 4 Quantity Price Total Revenue Marginal Revenue Average Revenue 0 $7 0 1 $7 $7 2 $7 $14 $7 $7 3 $7 $21 $7 4 $7 $28 $7 5 $7 $35 $7 6 $7 $42 $7

Quantity Price Total Revenue Marginal Revenue Average Revenue 0 $7 0 1 $7 $7 2 $7 $14 $7 $7 3 $7 $21 $7 $7 4 $7 $28 $7 $7 5 $7 $35 $7 $7 6 $7 $42 $7 $7 Total Revenue = Price x Quantity Marginal Revenue = change in total revenue change in quantity Average Revenue = total revenue quantity MR = P = AR = D

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The graph shows the cost curves of a firm in a perfectly competitive market. Mark profit maximizing output. Price/Costs

Are the following statements true or false at the firm’s profit maximizing level of output? Average Revenue equals Marginal Cost. True Price/Costs The firm is earning economic profits. True – MR greater than ATC The Marginal Cost Equals average total cost False The firm should continue to operate in the short run True – MR is greater than AVC

Draw graphs side by side to show • Changes in supply and demand for the market will change the price the firm must accept • Price changes will lead to changes in quantity • Price changes will lead to changes in losses

$7. 00 Fanny gets her price of $7 from the market price.

Total Revenue – Total Cost = Profit Price x Quantity = Total Revenue Average Total Cost x Quqntity = Total Cost SO – to calculate profit we can rearrange to make this new formula (Price – Average Total Cost) x Q = Profit

$7. 00 Calculate Fannie’s Profit (Price – Average Total Cost) x Q = Profit ($7 – 7) x 8 = $0 profit

PRACTICE FRQ

Corn is used for food and in the production of ethanol, an alternative fuel. Assume corn is produced in a perfectly competitive market. a. Draw correctly labeled sixe by side graphs for the corn market and a representative corn farmer. On your graphs show each of the following. i. The equilibrium price and quantity in the corn market, labeled Pm and Qm, respectively. ii. The profit maximizing quantity of corn produced by the representative farmer earning zero economic profit, labeled Qf

Corn is used for food and in the production of ethanol, an alternative fuel. Assume corn is produced in a perfectly competitive market. b. Assume the demand for ethanol increases. On your graphs in part (a) show what will happen to each of the following in the short run. i. The market price and quantity of corn, labeled P* and Q * ii. The area of profit or loss earned by the representative corn farmer, shaded completely

Corn is used for food and in the production of ethanol, an alternative fuel. Assume corn is produced in a perfectly competitive market. b. Assume the demand for ethanol increases. On your graphs in part (a) show what will happen to each of the following in the short run. i. The market price and quantity of corn, labeled P* and Q * ii. The area of profit or loss earned by the representative corn farmer, shaded completely

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ANOTHER PRACTICE FRQ

Remember in the long run firms can freeling enter and exit the market. Keep this in mind when answering the following question Narvaizville’s Orchard grows apples and operates in a constant-cost, perfectly competitive apple industry. Narvaizville’s Orchard is currently in long run equilibrium. (a) Draw correctly labeled side-by-side graphs for the apple market and Narvaizville’s Orchard. i. Market output and price, labeled as Qm and Pm respectively. Ii. Narvaizville’s output and price, labeled as Qf and Pf respectively.

Narvaizville’s Orchard grows apples and operates in a constant-cost, perfectly competitive apple industry. Narvaizville’s Orchard is currently in long run equilibrium. (b) Now assume the government provides farm support to apple growers by granting an annual lump sum subsidy to all apple growers. Indicate the effct the subsidy would have on each of the following in the short run i. Narvaizville’s quantity of output. Explain Ii. Narvaizville’s profit iii. The number of firms in the industry

Narvaizville’s Orchard grows apples and operates in a constant-cost, perfectly competitive apple industry. Narvaizville’s Orchard is currently in long run equilibrium. (b) Now assume the government provides farm support to apple growers by granting an annual lump sum subsidy to all apple growers. Indicate the effct the subsidy would have on each of the following in the short run i. Narvaizville’s quantity of output. Explain No change in Quantity. Lump Sum subsidy will not affect MC so new Quantity Ii. Narvaizville’s profit Subsidy will lower FC and therefore TC, so profits increase iii. The number of firms in the industry No change Firms cannot enter in the short run

Narvaizville’s Orchard grows apples and operates in a constant-cost, perfectly competitive apple industry. Narvaizville’s Orchard is currently in long run equilibrium. (c) indicate how each of the following will change in the long run i. The number of firms in the industry ii. Price iii. Industry output

Narvaizville’s Orchard grows apples and operates in a constant-cost, perfectly competitive apple industry. Narvaizville’s Orchard is currently in long run equilibrium. (c) indicate how each of the following will change in the long run i. The number of firms in the industry It will increase because the existence of profit attracts firms ii. Price It will decrease as supply increase iii. Industry output It will increase – more sellers more apples

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