1. 8 Perfect Competition SLIDES CREATED BY ERIC CHIANG CHAPTER 8 SLIDE 1
RADIUS IMAGES/ALAMY
CHAPTER SLIDE 1

2. CHAPTER OBJECTIVES
Name the primary market structures and describe their characteristics.
Define a perfectly competitive market and the assumptions that underlie it.
Determine a competitive firm’s profit maximizing quantity and price.
Analyze the conditions for profit maximization, loss minimization, and plant shutdown for a firm. 
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3. CHAPTER OBJECTIVES Derive the firm’s short-run supply curve.
Use the short-run competitive model to determine market entry and exit in achieving long-run equilibrium.
Describe why competition is in the public interest.
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4. Market structure depends on:
MARKET STRUCTURE ANALYSIS
By observing a few industry characteristics, we can predict pricing and output behavior.
Market structure depends on:
number of firms.
nature of product.
barriers to entry.
control over price.
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5. MONOPOLISTIC COMPETITION
PRIMARY MARKET STRUCTURES
PERFECT COMPETITION
MONOPOLISTIC COMPETITION
OLIGOPOLY
MONOPOLY
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6. THE CORN AND WHEAT INDUSTRIES ARE EXAMPLES OF PERFECT COMPETITION.
AGSTOCK IMAGES, INC./ALAMY
THE CORN AND WHEAT INDUSTRIES ARE EXAMPLES OF PERFECT COMPETITION.
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7. Characteristics of perfect competition include:
many buyers and sellers.
homogeneous (standardized) products.
no barriers to market entry or exit.
no long-run economic profit.
no control over price.
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8. THE RESTAURANT INDUSTRY IS AN EXAMPLE OF MONOPOLISTIC COMPETITION
EASTPHOTO/AGE FOTOSTOCK
THE RESTAURANT INDUSTRY IS AN EXAMPLE OF MONOPOLISTIC COMPETITION
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9. Characteristics of monopolistic competition include:
many buyers and sellers.
differentiated products.
little to no barriers to market entry or exit.
no long-run economic profit.
some control over price.
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10. THE AUTOMOBILE INDUSTRY IS AN OLIGOPOLY
CHRISTOPHER HONEYWELL/ALAMY
THE AUTOMOBILE INDUSTRY IS AN OLIGOPOLY
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11. Characteristics of oligopoly include:
relatively few firms.
interdependent decision making.
substantial barriers to market entry.
potential long-run economic profit.
shared market power.
considerable control over price.
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12. THE NATIONAL FOOTBALL LEAGUE IS A MONOPOLY
CHRIS CHAMBERS/GETTY IMAGES
THE NATIONAL FOOTBALL LEAGUE IS A MONOPOLY
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13. Characteristics of monopoly include:
one firm.
no close substitutes for product.
nearly insuperable barriers to entry.
potential long-run economic profit.
substantial market power and control over price.
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14. In a perfectly competitive market, each firm is a price taker:
PERFECTLY COMPETITIVE MARKETS
In a perfectly competitive market, each firm is a price taker:
Individual firms get their prices from the market because they are so small that they cannot influence the market price.
They take the price as given.
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15. MARGINAL REVENUE = ΔTR / ΔQ
THE CHANGE IN TOTAL REVENUE THAT RESULTS FROM THE SALE OF ONE ADDITIONAL UNIT OF A PRODUCT.
TOTAL REVENUE = P × Q
MARGINAL REVENUE = ΔTR / ΔQ
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16. VS. FIRM DEMAND CURVE MARKET DEMAND CURVE S PRICE ($) PRICE ($) D = MR
200
200
D = MR D Qe q1 q2
INDUSTRY OUTPUT
TYPICAL FIRM’S OUTPUT
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17. THE PROFIT MAXIMIZATION RULE
A FIRM MAXIMIZES PROFIT BY PRODUCING AT THE POINT WHERE MARGINAL REVENUE EQUALS MARGINAL COST (MR = MC).
WE FIRST FOCUS ON SHORT-RUN (FIXED PLANT SIZE) PROFIT MAXIMIZATION.
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18. SHORT-RUN PROFIT MAXIMIZATION
120 MC
100 80
COST
D = MR 60
Marginal cost of the 83rd unit is less than MR (relinquishing the normal return from the 84th unit). 40 20 83 84 85
OUTPUT
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19. COMPETITIVE FIRM EARNING PROFITS
120 MC
100 80
ATC
COST
D = MR 60
PROFITS
AVC 40
Profit = (P − ATC) × Q 20 83 84 85
OUTPUT
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20. FIVE STEPS TO MAXIMIZING PROFIT
Step 1: Find MR = MC
120 MC
100
Step 2: Find optimal Q 80
ATC
COST 3
D = MR 1 60
PROFITS 5
AVC
Step 3: Find optimal P 4 40
Step 4: Find ATC 20 2
Step 5: Find profit 83 84 85
OUTPUT
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21. AT LEAST ONE FACTOR OF PRODUCTION (SUCH AS PLANT SIZE) IS FIXED.
SHORT RUN VS. LONG RUN
SHORT RUN
LONG RUN
ALL FACTORS ARE VARIABLE. FIRMS ENTER IN RESPONSE TO PROFITS AND EXIT IN RESPONSE TO LOSSES.
AT LEAST ONE FACTOR OF PRODUCTION (SUCH AS PLANT SIZE) IS FIXED.
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22. Normal profits are equal to zero economic profit where P = ATC.
1,200
1,000 MC
ATC
800
AVC
COST
D = MR
600
Normal profits are equal to zero economic profit where P = ATC.
400
200 1 2 3 4 5 6
OUTPUT
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23. ZERO ECONOMIC PROFIT IN THE LONG RUN
A perfectly competitive firm earns zero economic profit in the long run.
Remember: zero economic profit (a normal profit) can still be a substantial accounting profit.
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24. © RICK BARRENTINE/CORBIS
LOSS MINIMIZATION: WHEN PRICE < ATC, FIRMS MINIMIZE LOSSES BY PRODUCING IF P > AVC OR SHUT DOWN IF P < AVC.
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25. COMPETITIVE FIRM WITH LOSSES
ATC MC
AVC
$80
LOSSES
COST
D = MR 70
Negative profit = (P − ATC) × quantity = (70 − 80) × 35 = −$350 35
OUTPUT
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26. SHUTDOWN POINTS
ATC MC
AVC
$80
LOSSES
COST 70
D = MR 65
When price falls below $65 (minimum point on AVC), losses exceed fixed costs.
SHUTDOWN POINT 30
OUTPUT
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27. SHORT-RUN SUPPLY CURVEMC
SHORT-RUN SUPPLY CURVE
ATC
AVC
A firm’s short-run supply curve is its marginal cost curve above the minimum point on the average variable cost curve.
COST
OUTPUT
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28. HERBERT SIMON (1916–2001)
Argued that firms are not always perfectly rational because they do not have perfect information and do not always strive to maximize profits.
Won the Nobel Prize in Economics in 1978.
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29. If firms take losses, some firms leave the industry.
LONG-RUN ADJUSTMENTS
If firms earn short-run economic profits, new firms enter the industry and existing firms expand their operations.
If firms take losses, some firms leave the industry.
Long-run equilibrium occurs where P = MR = MC = LRATCmin.
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30. ECONOMIC PROFITS ATTRACT ENTRY
INDUSTRY
FIRM S0 MC
PRICE ($)
PRICE ($) S1
ATC 20 20
D0 = MR0
PROFITS 15 15
D1 = MR1 D Q0 Q1 q1 q0
INDUSTRY OUTPUT
TYPICAL FIRM’S OUTPUT
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31. ECONOMIC LOSSES LEAD TO EXIT
INDUSTRY
FIRM S1 S0 MC
PRICE ($)
PRICE ($)
ATC 25 25
D1 = MR1
LOSSES 20 20
D0 = MR0 D Q1 Q0 q0 q1
INDUSTRY OUTPUT
TYPICAL FIRM’S OUTPUT
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32. GOODS ARE SUPPLIED AT THE LOWEST POSSIBLE COST.
The long-run outcome in competitive markets exhibit:
PRODUCTIVE EFFICIENCY:
GOODS ARE SUPPLIED AT THE LOWEST POSSIBLE COST.
ALLOCATIVE EFFICIENCY:
MIX OF GOODS AND SERVICES IS JUST WHAT SOCIETY DESIRES.
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33. When an industry expands, how do resource prices change?
LONG-RUN INDUSTRY SUPPLY
Depends on long-run average total cost (LRATC), which varies according to economies or diseconomies of scale.
When an industry expands, how do resource prices change?
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34. PJRSTUDIO/ALAMY
INCREASING-COST INDUSTRY: AS INDUSTRY EXPANDS, DEMAND FOR RAW MATERIALS (SUCH AS PRECIOUS METALS) INCREASES PRICES.
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35. © CHARLES PERTWEE/CORBIS
DECREASING-COST INDUSTRY: AS INDUSTRY EXPANDS, ECONOMIES OF SCALE RESULT IN LOWER PRICES (e.g., COMPUTER CHIPS).
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36. CONSTANT-COST INDUSTRY: EXPANDS IN THE LONG RUN WITHOUT SIGNIFICANT CHANGES IN COST (e.g., FAST FOOD RESTAURANTS)
ERIC CHIANG
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37. LONG-RUN COMPETITIVE EQUILIBRIUM
INDUSTRY
FIRM S0 MC
LRATC
SRATC
PRICE
PLR
PRICE AND COST
PLR
D0 = MR D
QLR
qLR
INDUSTRY OUTPUT
TYPICAL FIRM’S OUTPUT
P = MR = MC = SRATCmin= LRATCmin
CHAPTER SLIDE 37

38. INCREASING-, CONSTANT-, OR DECREASING-COST INDUSTRY
INCREASING COSTS
CONSTANT COSTS
DECREASING COSTS S0 S0 S0 b S1 b S1
SLR b S1 c a c
PRICE
PRICE
PRICE
SLR a a c D1 D1 D0
SLR D0 D1 D0
OUTPUT
OUTPUT
OUTPUT
CHAPTER SLIDE 38

39. KEY CONCEPTS Market structure analysis Perfect competition Price taker
Marginal revenue
Profit-maximization rule
Normal profits
Shutdown point
Short-run supply curve
Increasing cost industry
Decreasing cost industry
Constant cost industry
KEY CONCEPTS
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40. WHICH OF THE FOLLOWING IS LIKELY TO BE THE MOST COMPETITIVE?
CABLE TELEVISION A
AUTOMOBILES AND TRUCKS B
OIL REFINING C
Answer: E
INTERNATIONAL AIR TRAVEL D
FARM COMMODITIES E
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41. EPA EUROPEAN PRESSPHOTO AGENCY CREATIVE ACCOUNT/ALAMY
PRACTICE QUESTION
IF THE MARGINAL REVENUE OF TEA IS $10 AND MARGINAL COST IS $5, WHY WOULDN’T THIS BE AN OPTIMAL LEVEL OF PRODUCTION?
Answer: When MR is greater than MC, a firm can increase profits by producing more. The optimal level of production occurs when MR = MC.
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42. IF GNOMES-R-US (A COMPETITIVE FIRM) PRODUCES AT THE POINT WHERE MARGINAL COST INTERSECTS THE AVERAGE TOTAL COST CURVE AT ITS MINIMUM POINT, THE FIRM WILL EARN:
ECONOMIC PROFITS. A
NORMAL PROFITS. B
Answer: B
A SHORT-RUN LOSS. C
NO PROFITS AT ALL. D
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43. AP PHOTO/JEFF BARNARD, FILE
PRACTICE QUESTION
Answer: If producers enter a competitive market, prices will fall, assuming that the demand does not significantly rise as a result of the change in law.
AS MORE STATES LEGALIZE MARIJUANA PRODUCTION, WHAT WILL HAPPEN TO THE MARKET PRICE?
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44. SHOULD A COMPETITIVE FIRM KEEP PRODUCING EVEN IF IT FACES SHORT-RUN LOSSES?
YES, BECAUSE IT IS EARNING NORMAL PROFITS. A
YES, AS LONG AS IT IS COVERING ITS VARIABLE COST. B
NO, A FIRM SHOULD NEVER INCUR LOSSES. C
Answer: B
NO, BECAUSE IT IS NOT COVERING ITS FIXED COST. D
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45. 8 END OF CHAPTER SLIDES CREATED BY ERIC CHIANG CHAPTER 8 SLIDE 45
Tshooter/Shutterstock; Anton Balazh/Shutterstock
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