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Microeconomics - Perfect Competition HL

Grade 11

Stephanie Seehaus

on 6 May 2015

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Transcript of Microeconomics - Perfect Competition HL

-In perfect competition, the average cost will equal average revenue in the long run.

-This is called the break-even point.

A shut down point for a firm occurs when AVC (avg variable cost) = AR (avg revenue) which means selling at the same price as it costs to produce each unit of output.
-Perfect competition is a model used as the starting point to explain how firms operate.

-It is a theoretical model, based upon some very precise assumptions.
Perfect competition requires many buyers and sellers, no barriers to entry/exit, homogeneous goods, perfect information.

• All producers are price takers. In the short run, they may make profits or losses but, as sellers enter/exit the market easily, in the long-run each firm will break-even.
Assumptions made for PC
-The industry is made up of a very large number of firms

-All producers and consumers have perfect knowledge of the market.

-Firms are completely free to enter or leave the industry.

-Each firm is so small relative to the size of the industry that it cannot affect the industry as a whole by changing its output

-The firms all produce identical products.
Profit maximization
In perfect competition there are 2 possible
profit/loss situations

-Short-run either abnormal profits/losses

-However, losses cannot persist in the long-run in perfect competition.

-For example,A bakery or other
bakeries in town, may be forced to leave the market and shut-down. The supply of bread in the
market will decrease – supply will shift leftward and the price of bread will go up, until the
equilibrium is reached: that is, when MC=MR
Perfect competition
Price taker
Concept in PC
Perfect Competition
Econ HL

-At perfect competition,producers and consumers alike have to accept the price set at equilibrium by the industry

-They are known as price-takers.

-The result is that, in perfect
competition, demand is perfectly elastic, i.e. PED is infinite
In the short run, firms can make either profits or losses. But in the long-run, the entry/exit of other firms will affect the equilibrium price so that each firms only
makes normal profits (break-even).
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