PERFECT COMPETITION

MARKET STRUCTURE
 Describes the important features of a market such as number of
suppliers, product’s degree of uniformity, firm’s ease of entry and
exit, and forms of competition.
 PERFECT COMPETITON
 A market structure with many fully informed buyers and sellers of a
standardized product and with no obstacles to entry or exit of firms
in the long run
 COMMODITY
 A standardized product that does not differ across producers
 PRICE TAKER
 a firm that faces a different market price and whose quantity
supplied has no effect on that price, a perfectly competitive firm that
decides to produce must accept or take the market price
MARGINAL REVENUE
 The firm’s change in total revenue from selling an additional unit, a
perfectly competitive firm’s marginal revenue is also the market
price
 MARGINAL
BUSHELS OF REVENUE TOTAL TOTAL COST MARGINAL AVERAGE TOTAL ECONOMIC PROFIT
WHEAT/ DAY (PRICE) REVENUE COST COST OR LOSS

0 - 0 15 - - -15
1 5 5 19.75 4.75 19.75 -14.75
2 5 10 23.5 3.75 11.75 -13.5
3 5 15 26.5 3 8.83 -11.5
4 5 20 29 2.5 7.25 -9
5 5 25 31 2 6.2 -6
6 5 30 32.5 1.5 5.42 -2.5
7 5 35 33.75 1.25 4.82 1.25
8 5 40 35.25 1.5 4.41 4.75
9 5 45 37.25 2 4.14 7.75
10 5 50 40 2.75 4 10
11 5 55 43.25 3.25 3.93 11.75
12 5 60 48 4.75 4 12
13 5 65 54.5 6.5 4.19 10.5
14 5 70 64 9.5 4.57 6
15 5 75 77.5 13.5 5.17 -2.5
16 5 80 96 18.5 6 -16
GOLDEN RULE FOR PROFIT MAXIMIZATION
 To maximize profit or minimize loss, a firm produces a quantity at
which marginal revenue equals marginal costs this rule holds for all
market structure
AVERAGE REVENUE
 Total revenue divided by quantity
 In all market structures, average revenue equals the market price
LONG RUN INDUSTRY SUPPLY CURVE
 A curve that shows the relationship between price and quantity
supplied by the industry once firms adjust in the long run to any
change in market demand
CONSTANT COST INDUSTRY
 an industry that can expand or contract without affecting the long
run per unit cost of production
INCREASING COST INDUSTRY
 An industry that faces higher per unit production costs as industry
output expands in the long run,
PRODUCTIVE EFFICIENCY
 Each firm employs the least cost combination of inputs, minimum
average cost in the long run
ALLOCATIVE EFFICIENCY
 Each firm produces the output most preferred by consumers,
marginal benefit equals marginal costs
MONOPOLY
 BARRIERS TO ENTRY
 Any impediment that prevents new firms from entering an industry
and competing on an equal basis with existing firms
 PATENT
 A legal barrier to entry that grants the holder the exclusive rights to
sell a product for 20 years from the date the patent application is
filed
PRICE MAKER
 A firm with some power to set the price because the demand curve
for its output slopes downward
 A firm with market power
DEADWEIGHT LOSS OF MONOPOLY
 Net loss to society when a firm with market power restricts output
and increases the price
RENT SEEKING
 Activities undertaken by individuals or firms to influence public
policy in a way that increases their income
PRICE DISCRIMINATION
 Increasing profit by charging different groups of consumers
different prices for the same product.