1. Perfect Competition part II
Chapter 14 continued

2. Unrealistic Assumptions of Perfect Competition?

3. 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 (no DWL)
Economic Profits = zero in long run (produce at min. of ATC)
inefficient producers are forced to leave
Perfectly “self regulating” system

4. PROFIT MAXIMIZATION Profit maximization occurs when MR = MC
When MR ≥ MC, increase output
When MR < MC, decrease output
When MR = MC, profit is maximized.

5. Shutdown vs. Exit Shutdown- a decision not to produce in short run
Firms only considers variable costs
Example: open at 7am or 8am? , Open for lunch?, 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

6. 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

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

8. Long Run Firm Supply Curve
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

9. Worksheet #2
Perfect Competition Equilibrium