Perfect Competition Lesson 11 Sections 58, 59, 60

Competition (58) Conditions of Perfect Competition Perfect competition is the goal of economists for a stable free market. Many sellers Selling identical products Able to enter and exit the market freely None of them are large enough to influence prices. There need to also be many well-informed buyers, all looking for the best prices. This keeps the system in equilibrium.

Table 58.1 Short-Run Costs for Jennifer and Jason’s Farm Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Production and Profits Price-Taking Firm’s Optimal Output Rule For a price-taking firm, the price is set by the market, so marginal revenue is the market price. When Marginal Cost = Marginal Revenue the firm is at optimal output.

Graphing Perfect Competition (59) Whether a firm is profitable or not depends on it’s own cost curve. If costs are less than revenue, profit is made, but if costs are greater than revenue, there is loss. The Marginal cost curve shows us the quantity of production where is crosses marginal revenue. The Average Total Cost (ATC) Curve shows us where our real costs are. If ATC is below Marginal Revenue, profit is made If ATC is above Marginal Revenue, there is a loss

The Short Run Production Decision While it might seem obvious to shut down production if Average Total Cost is greater than Marginal Revenue, but this might be because of fixed costs not changeable in the short run. The Shut Down Price The shut down price is where the price is less than minimum Average Variable Costs, because the business is not even recovering the variable costs.

Figure 59.2 The Short-Run Individual Supply Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Table 59.1 Summary of the Perfectly Competitive Firm’s Profitability and Production Conditions Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

The Industry Supply Curve The Industry Supply Curve shows the relationship between price and total output.

The Long-Run Industry Supply Curve The Long-Run Industry Supply Curve will be more elastic (everything is more elastic in the long run.) As more suppliers enter the market, prices drop

Effects of an Increase in Demand Long-Run and Short-Run In the Short-Run, and increase in demand will raise prices, and quantity will follow In the Long –Run, prices will move to a point of zero-profit