Perfect Competition

Conditions & Characteristics of Perfect Competition

No. of firms Very many
Output of firms Homogenous; Identical
Pricing Price taker market determined price
Entry/Exit Barriers No
Output & Pricing MR = MC = P, q* at min AC
Short Run Profit Positive, zero or negative
Long Run Profit Zero
Advertising Never
Property rights Well specified/ obvious ownership
Complete information Yes

Price = Demand curve = Average Revenue = Marginal Revenue
Profit = = TR TC, = TR TFC - TVC
Profit = = q (AR AC)
Profit = = q (p AC)
Profit from shutting down Profit from keep on running at q quantity
-TFC TR-TFC-TVC or TR - TC
TVC TR
AVC P
AVC AR

Profit maximization condition is MR = MC for continuous quantities
MR MC for discrete quantities
Supply Curve = Marginal Cost (MC) curve (or also vertical line between AVC and MC)
Accounting Cost = Explicit Cost = you write a check for them or you dispense cash
Accounting profit = TR Accounting cost
Economic cost = implicit cost = you don't write a check or you don't give cash
Economic profit = TR economic cost
Economic profits < Accounting profits (always except in cases no implicit costs)
Long Run Dynamics & Equilibrium
> 0 Entry occurs Number of firms Supply supply curve shifts R P*, Q*, to 0.
< 0 Exit occurs Number of firms Supply supply curve shifts L P*, Q*, to 0.

Revenue Concepts
Total Revenue (TR) = p q, where p is the price per unit and q
is the number of units sold
Example: A gas station sells 1000 gals. of gas at $3.00 per
gallon.
TR = $3,000
Average Revenue (AR) = TR/q = (p q) / q = p; so AR is just a
fancy name for price
Marginal Revenue (MR) =TR/ q = the additional revenue
received from selling the last unit
Example: The 110th widget is sold for $40; so TR = 40, q=
1, so the MR of the 110th unit = 40.

Showing the Firms Profits
Graphically
P = MR = AR
P
q
P
*
MC
q
*
O
AC
P AC at q
*
Profits

Showing the Firms Losses
Graphically
P
q
P
*
MC
q
*
O
AC
At q
*
, P AC < 0
so the firm is
making losses
Losses


The Firms Supply Curve
q
MC
$/unit
AC
AVC
S


0
S
LR
P
Perfectly Elastic Supply Curve
Q
S
SR
In the LR, S is perfectly elastic at the
min of AC for a typical firm; there is
only one possible price:
P
*
LR
= min AC
P
*
LR