1. ECN 201: Principles of Microeconomics
Nusrat Jahan
Lecture-8
Perfect Competition

2. Perfect Competition
 Under perfect competition, there are many small firms, each producing an identical product and each too small to affect the market price.
 The perfectly competitor faces a completely horizontal demand curve.
 The extra revenue gained from each extra unit sold is therefore the market price.
Marginal Revenue- Marginal revenue is the change in total revenue that results from a one-unit increase in quantity sold
A firm decides how much to sell on the basis of the amount of profit it earns.
Total Profit (TP) = Total Revenue – Total Cost
Since competitive firm faces a perfectly horizontal demand curve the firm also faces an upward sloping total revenue curve.
Profit is maximized when Marginal Revenue = Marginal Cost
For Perfectly Competitive firm Marginal Revenue = Price
So the profit maximizing condition for a competitive firm is,
P = MC

3. Profit Maximizing Condition:

4. Competitive Firm’s Supply Curve in the Short-run

5. THE FIRM’S LONG-RUN DECISION TO EXIT OR ENTER A MARKET
The firm exits the market if the revenue it would get from producing is less than its total costs.
Exit if TR < TC
By dividing both sides of this inequality by quantity Q, we can write it as
Exit if TR/Q < TC/Q
We can simplify this further by noting that TR/Q is average revenue, which equals the price P, and that TC/Q is average total cost ATC. Therefore, the firm’s exit criterion is
Exit if P < ATC
The entry criterion is
Enter if P ATC.

6. The Competitive Firm’s Long-run Supply Curve
In the long run, the competitive firm’s supply curve is its marginal-cost curve (MC) above average total cost (ATC). If the price falls below average total cost, the firm is better off exiting the market.