Perfect Competition part II Chapter 14 continued Perfect

Perfect Competition part II Chapter 14 continued

Perfect Competition in Action • Profit or Loss only in short run – Economic profit > 0 => – Economic profit < 0 => new firms enter market firms exit the market • Benefits of Perfect Competition – – Lowest price & highest Qty produced (no DWL) Economic Profit = zero in long run (produce at min. of ATC) inefficient producers forced to leave (no slackers allowed) Perfectly “self regulating” system (no government regulation)

Competitive Markets in Action AVC D 2 = MR 2 D 2

PROFIT MAXIMIZATION • Profit maximization occurs when MR = MC – When MR > MC, increase output – When MR < MC, decrease output Only when MR = MC is profit is maximized -------- =D

Shutdown vs. Exit • Shutdown- a decision not to produce in short run – Firms only considers variable costs • Example: open at 7 am or 8 am? , Open for lunch or only dinner, etc… – Based only on AVC curve! (fixed costs are sunk!) – Shutdown when P < AVC • Exit- a long-run decision to leave the market – Firms consider all costs (variable & fixed costs) – Based only on ATC curve! – Exit when P < ATC

Short Run Vs. Long Run: P < ATC => Exit Industry Stay open Zone Short Run: P ≥ AVC => stay open

Worksheet #2 • Perfect Competition Equilibrium