1. Perfect Competition Continued…

2. Key Graph (Figure 9-6) P1 – Company should not operate at all P2 – Operate at Q2 to cover variable costs, fixed costs will be lost. Shut-Down Point P3 – To minimize losses, operate at Q3. It is above AVC. P4 – The Break Even Point. Q4 P4+ Anything above P4 = higher profits.

3. Marginal Cost Curves and Supply In Figure 9-7 (230) note the similarity between the MC curve and the S curve. How much we supply (Q) is directly related to how much it costs to make the product (MC), and how much we are paid to produce it (P). Many factors that cause supply to shift cause MC to shift.

4. Market Shifts Since we utilize Marginal Revenue = Marginal Cost to find our profit maximizing point, drops in demand hurt profits. Note similarity between MR and D. Businesses have to pay close attention to demand, otherwise they might be producing too much or too little, which hurts business. Figure 9-7 (What would happen if D declines?)

5. Key Question 4 (243)

6. Long-Run Profit Maximization In the long-run firms can adjust their plant capacities or enter or leave the industry. After all long-run adjustments are made the Price = Minimum ATC. Previously, in the short-run, they would still operate at Minimum AVC, why?

7. Why does P = Min. ATC? Firms seek profits and avoid losses. If they do not make money, they leave the industry. Firms leaving the industry reduces supply, which increases price for firms that remain. If an industry is profitable, new firms join, this increases supply and reduces price back to Min. ATC... Or lower. Which starts the cycle again.

8. Long-Run Equilibrium Long-Run Equilibrium in the Perfectly Competitive industry is created by businesses seeking higher profits or reduced losses. Over-time, supply and demand oscillate back and forth around the equilibrium point. Figures 9-8 and 9-9 (232-233)

9. Costs and the Slope of Supply If costs are constant, firms entering or leaving the industry do not affect resource prices, supply is perfectly elastic. Fig 9-10 Most industries have increasing costs, which means that firms entering the industry increase resource costs for the others. Fig 9-11 Higher costs shift the ATC upwards. Some industries have decreasing costs.

10. Pure Competition and Efficiency Productive and Allocative Efficiency lead to the most efficient use of scarce resources. Productive Efficiency: P = Minimum ATC In the Long-Run firms must produce at the minimum ATC because new firms are coming and going. Productive Efficiency MUST be achieved in perfect competition or you will not survive. This is called the low-cost producer.

11. Allocative Efficiency and Perfect Competition. The Price of any product is society’s measure of the relative worth of an additional unit. The long-run price = the marginal benefit The long-run price = the marginal cost (otherwise we would not sacrifice the resources) Under allocation: P > MC Over allocation: P < MC

12. The Commodities Exchange

13. The pre-eminent example of perfect competition in practice on a daily basis is the Chicago Board of Trade. It facilitates the purchase and sale of a multitude of commoditized or standardized goods, such as wheat, barley, sugar, cotton et cetera. http://www.cmegroup.com/company/cbot.ht ml http://www.cmegroup.com/company/cbot.ht ml

14. Market Structure Summary Videos It helps to watch these prior to completing the chapter assignment for Perfect Competition. The Market Structures Perfect Competition Summarized

15. Assignment # 12 Questions 5, 7, and 8 on page 244.