Perfect Competition part II Chapter 14 continued

Unrealistic Assumptions of Perfect Competition?

Perfect Competition in Action Economic profit > 0 => new firms enter market Economic profit < 0 => firms exit the market Benefits of Perfect Competition Lowest price & highest quantity produced Profits are pushed to zero in long run inefficient producers are forced to leave Perfectly “self regulating” system

PROFIT MAXIMIZATION Profit maximization occurs where MR = MC When MR > MC, increase Qty produced When MR < MC, decrease Qty produced When MR = MC, profit is maximized.

Shutdown vs. Exit Shutdown- a decision not to produce in short run Firms only considers variable costs 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

Price MC ATC AVC P D = MR Q MAX P > AVC => firm should stays “open” in short run to minimize loss In long run firm would exit market P < ATC Quantity

Short-Run Supply Curve Costs Short Run Supply Curve is MC above AVC MC ATC AVC Firm shuts down if P < AVC Quantity

Long Run Supply Curve Price MC P Q ATC P Q AVC Quantity As Price increases => the firm will produce more! Price The Firm’s MC curve above ATC is the Long run supply curve MC P 2 Q ATC P 1 Q AVC Quantity

Worksheet #2 Perfect Competition Equilibrium