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Perfect Competition

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by

Lauren Antakli

on 15 January 2013

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Transcript of Perfect Competition

Perfect Competition By: Rachel Loken and Lauren Antakli The Competitive Market 1) Many buyers and sellers
2) Goods in the market are
all largely the same
3)Firms can freely enter
and exit the market All firms in a competitive market are
PRICE TAKERS
because the actions of
one firm can't
influence the market
price. Average Revenue = Total revenue/
Quantity Sold Marginal Revenue (Each additional unit sold) = Change in Total Revenue/
Change in Quantity Total Revenue = Price x Quantity MR.DARP Marginal Revenue
= Demand
= Average Revenue
= Price S D MR.DARP The main goal of
firms in perfect
competition is
PROFIT MAXIMIZATION Profit = Total Revenue -
Total Cost for Profit
Maximization . . . MR = MC MC MR.DARP Profit Maximization Firms will make a profit if their Average Total Cost is
BELOW the point where
MR=MC MC MR ATC For example, if this is the
graph for a firm . . . MR = MC Their profits would be here MC MR ATC Short-Run vs. Long-Run Firms cannot avoid fixed
costs in the short-run, but
they can avoid fixed costs
in the long-run Shutdown A short-run
decision not to produce anything
during a specific
period of time Firms shutdown if they lose all
revenue from the sale of their
products (When price falls below AVC) MC ATC AVC The firm still has to pay its fixed
costs, but it doesn't have to pay its variable costs for making the product Sunk Costs A cost that has already
been committed and
cannot be recovered - Opposite of opportunity
costs because sunk costs
are unavoidable - Can be ignored when
deciding how much of
a product to produce Exit A long-run decision to leave the market A firm exits the market if it
loses all revenue from the sale
of its product (Saves on both fixed and
variable costs) MC ATC MR Entry Criteria for entry into
the market is the
exact opposite of the
criteria for exit MR Long-Run Equilibrium The point where the
price is equal to the marginal cost and the
average total cost so
the firm receives no
profit MC ATC MR Even when demand
and supply shift, the firm will always
return to the
long-run equilibrium Initial Condition Price S D MC ATC At equilibrium with zero profit Short-Run Response The demand curve shifts right causing an
increase in price and creating a profit D1 D S New Price MC ATC Profit Long-Run Response The increase in price causes more firms to enter
the market and shift supply to the right, bringing
the price back to equilibrium S S1 Price D D1 MC ATC THE END
Full transcript