A-Level Economics - The Price System and The Micro Economy (Perfect Competition)

14
A2 ECONOMICS
THE PRICE SYSTEM & THE MICRO

ECONOMY
(PERFECT COMPETITION)
Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

PERFECT COMPETITION
 A market is perfectly competitive if…
 …there are many buyers and sellers, none of whom have a large market share.
 …there are no barriers to entry or exit (i.e. free entry and exit).
 …the industry output is homogeneous (i.e. the product is standardized so the only
selection criterion for buyers is the price).
 …there is perfect information (i.e. buyers know the prices charged by each seller.)
 Remark: Perfect competition represents an ideal and does not exist in the real-
world. However, the underlying theoretical framework is useful in the sense that
it provides a benchmark against which alternative market structures can be
examined.

PERFECT COMPETITION
 What happens when a perfectly competitive firm charges a price above the market
price?
 In perfect competition, the market price is determined by the market forces of

supply and demand.
 Each individual participant (i.e. buyer or seller) is a relatively small part of the
market and therefore has no influence on the market price, no matter how much
output she buys or sells.
 3 important questions:
 What happens when a perfectly competitive firm charges a price above the market price?
 What happens when a perfectly competitive firm charges the market price?
 What happens when a perfectly competitive firm charges a price below the market price?

CHARGING A PRICE ABOVE THE MARKET
PRICE
 The industry output is homogeneous so the only selection criterion for buyers
is the price.
 Besides, buyers know what price is charged by each firm in the market.
 Therefore, the quantity demanded from a firm charging a price above market
price is equal to zero.
 It follows that a perfectly competitive firm will never charge a price above
market price.

CHARGING THE MARKET PRICE
 The model of perfect competition assumes that each individual firm can sell as
much output as it wants at the market price (i.e. any quantity between zero and
the entire market quantity demanded at that price).
 Hence, the individual demand facing a perfectly competitive firm is perfectly

price-elastic at the market price (i.e. represented by a horizontal line).
 Consequently, a perfectly competitive firm will never charge a price below

market price (i.e. there is no need to cut the price below the market price to sell
more output).
 Overall, perfectly competitive firms are price-takers in the sense that they will
always charge the market price on which they have no influence.

CHARGING A PRICE BELOW THE MARKET
PRICE
 The quantity demanded from a firm charging a price below market price is
equal to the entire market quantity demanded at that price.
 However, as we explained earlier, a perfectly competitive firm has no incentive

to charge a price below the market price.
 Besides, an individual firm charging a price below the market price would be
unable to supply the entire market demand at that price.
 That is, the firm’s technology is such that it can only supply a small part of the
market quantity demanded at that price.

INDIVIDUAL DEMAND CURVE

PRICE
QUANTITY
MARKET
PRICE
S
QUANTITY
MARKET
PRICE
S
DM
QUANTITY
MARKET
PRICE
S
∗
𝑝
DM
∗
QUANTITY
𝑄
MARKET
PRICE
S
𝑝1
∗
𝑝
DM
QUANTITY
𝑞1 𝑄
∗
MARKET
PRICE
S
𝑝1
∗
𝑝
DM
QUANTITY
𝑞1 𝑄
∗
MARKET
PRICE
S
𝑝1
∗
𝑝
DM
QUANTITY
𝑞1 𝑞
∗
𝑄
∗
MARKET
PRICE
S
𝑝1
∗
𝑝
DM
QUANTITY
𝑞1 𝑞
∗
𝑄
∗
MARKET
PRICE
S
𝑝1
∗
𝑝
𝑝2
DM
QUANTITY
𝑞1 𝑞
∗
𝑄
∗
𝑞2
MARKET
PRICE DM
S
𝑝1
∗
𝑝
𝑝2
DI = AR
QUANTITY
𝑞1 𝑞
∗
𝑄
∗
𝑞2
MARKET

COST /
REVENUE
QUANTITY
INDIVIDUAL FIRM
COST /
REVENUE
∗
𝑝
DI = AR
QUANTITY
INDIVIDUAL FIRM
COST /
REVENUE
ATC
MC
∗
𝑝
DI = AR
QUANTITY
INDIVIDUAL FIRM
COST /
REVENUE
ATC
MC
∗
𝑝
RELEVANT
RANGE OF DI = AR
OUTPUT
QUANTITY
INDIVIDUAL FIRM
COST /
REVENUE
ATC
MC
∗
𝑝
IRRELEVANT
RANGE OF DI = AR
OUTPUT
QUANTITY
INDIVIDUAL FIRM

PRICE
QUANTITY
INDIVIDUAL FIRM

PRICE
∗
𝑝 DI = AR
QUANTITY
INDIVIDUAL FIRM

PRICE
BY CONVENTION, WE DO NOT
DRAW THE PERFECTLY PRICE-
INELASTIC SECTION OF THE
∗
𝑝 DI = AR
QUANTITY
INDIVIDUAL FIRM

PRICE
∗
𝑝 DI = AR
QUANTITY
INDIVIDUAL FIRM

SR & LR EQUILIBRIA IN PERFECT COMPETITION
 Reminder: A perfectly competitive firm can sell as much output as it wants at the
market price (i.e. it does not need to cut the price below the market price to sell
more output).
 Therefore, the MR of a perfectly competitive firm is equal to the market price

(i.e. the firm’s AR).
MR = AR = P
 As a result, the optimum output rule for a perfectly competitive firm is given by:
MC = MR ⇔ MC = AR = P

 In what follows, we shall assume that all firms are identical (i.e. they have the
same cost structure).
 In the SR, a fixed number of firms maximize their individual profit by producing
the level of output such that MC = AR = P.
 Let’s assume that each individual firm makes abnormal profit in the SR.
 In the LR, the existence of abnormal profit combined with the free-entry
assumption attracts new firms within the industry.

 This leads to an increase in the market supply and to a fall in the equilibrium
price.
 The entry process stops when each individual firm makes normal profit, that is,
when the equilibrium price is equal to the minimum of the ATC.
 Nb: Compared to the SR equilibrium, the LR market equilibrium output is larger

even though each individual firm supplies a smaller output.
 Now, let’s assume that each individual firm makes subnormal profit in the SR.

 In the LR, the existence of subnormal profit combined with the free-exit
assumption drives some firms out of the industry.
 This leads to a decrease in the market supply and to an increase in the

equilibrium price.
 The exit process stops when each individual firm makes normal profit, that is,
when the equilibrium price is equal to the minimum of the ATC.
 Nb: Compared to the SR, the LR market equilibrium output is smaller even
though each individual firm supplies a larger output.


PRICE
QUANTITY
(BILLIONS)
MARKET
PRICE
S1
QUANTITY
(BILLIONS)
MARKET
PRICE
S1
QUANTITY
(BILLIONS)
MARKET
COST /
PRICE REVENUE
S1
QUANTITY QUANTITY
(BILLIONS) (THOUSANDS)
MARKET INDIVIDUAL FIRM

COST /
PRICE REVENUE
S1
ATC
QUANTITY QUANTITY

COST /
PRICE REVENUE
S1
MC ATC
QUANTITY QUANTITY

COST /
PRICE REVENUE
S1
MC ATC
𝑝1
𝑄1 QUANTITY QUANTITY

COST /
PRICE REVENUE
S1
MC ATC
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
S1
MC ATC
𝑝1 AR1 = MR1
𝑄1 QUANTITY 𝑞1 QUANTITY

COST /
PRICE REVENUE
S1
MC ATC
𝑝1 AR1 = MR1
𝐴𝑇𝐶1

COST /
PRICE REVENUE
S1
MC ATC
𝑝1 AR1 = MR1
𝚷> 𝟎
𝐴𝑇𝐶1

COST /
PRICE REVENUE
S1
MC ATC
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
S1 S2
MC ATC
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
S1 S2
MC ATC
𝑝1 AR1 = MR1
𝑝2
𝑄1 𝑄 2 QUANTITY 𝑞1 QUANTITY

COST /
PRICE REVENUE
S1 S2
MC ATC
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄1 𝑄 2 QUANTITY 𝑞1 QUANTITY

COST /
PRICE REVENUE
S1 S2
MC ATC
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄1 𝑄 2 QUANTITY 𝑞 2 𝑞1 QUANTITY

COST /
PRICE REVENUE
S1 S2
MC ATC
NORMAL
PROFIT
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄1 𝑄 2 QUANTITY 𝑞 2 𝑞1 QUANTITY


PRICE
QUANTITY
(BILLIONS)
MARKET
PRICE
S1
QUANTITY
(BILLIONS)
MARKET
PRICE
S1
QUANTITY
(BILLIONS)
MARKET
COST /
PRICE REVENUE
S1
QUANTITY QUANTITY

COST /
PRICE REVENUE ATC
S1
QUANTITY QUANTITY

COST /
PRICE REVENUE
MC ATC
S1
QUANTITY QUANTITY

COST /
PRICE REVENUE
MC ATC
S1
𝑝1

COST /
PRICE REVENUE
MC ATC
S1
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
MC ATC
S1
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
MC ATC
S1
𝐴𝑇𝐶1
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
MC ATC
S1
𝐴𝑇𝐶1
𝑝1
𝚷< 𝟎 AR1 = MR1

COST /
PRICE REVENUE
MC ATC
S1
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
MC ATC
S2 S1
𝑝1 AR1 = MR1

COST /
PRICE REVENUE
MC ATC
S2 S1
𝑝2
𝑝1 AR1 = MR1
𝑄 2 𝑄1 QUANTITY 𝑞1 QUANTITY

COST /
PRICE REVENUE
MC ATC
S2 S1
𝑝2 AR2 = MR2
𝑝1 AR1 = MR1
𝑄 2 𝑄1 QUANTITY 𝑞1 QUANTITY

COST /
PRICE REVENUE
MC ATC
S2 S1
𝑝2 AR2 = MR2
𝑝1 AR1 = MR1
𝑄 2 𝑄1 QUANTITY 𝑞1𝑞 2 QUANTITY


COST /
PRICE REVENUE
MC ATC
S2 S1
NORMAL
PROFIT
𝑝2 AR2 = MR2
𝑝1 AR1 = MR1
𝑄 2 𝑄1 QUANTITY 𝑞1𝑞 2 QUANTITY


SHUT DOWN PRICE IN THE SR
 In the SR, a firm shuts down (i.e. temporarily suspends production) if the price
falls below the minimum of the AVC (i.e. the shut down price).
 By shutting down, a firm can eliminate all VC but it must still pay FC
 Therefore, the FC should not be considered in deciding whether to produce or

to shut down (i.e. the FC is sunk in the SR, it has already been incurred and
cannot be recovered).
 Nb: Temporary shutdowns are common in industries whose demand is highly

seasonal (e.g. amusement parks, ski resorts, etc.)

 Firm’s profit if it shuts down:
= - FC
 Firm’s profit if the stays in business:
= TR – TC = TR – VC - FC
 The firm is better off staying in business so long as
> = TR > VC AR = P > AVC
 Intuition: If TR > VC (i.e. if AR = P > AVC), then the firm covers all VC and at least
some of the FC when staying in business. If it shuts down, however, it incurs a
loss equal to the whole FC.

SHUT DOWN PRICE IN THE SHORT-RUN

COST /
REVENUE
QUANTITY

COST /
REVENUE
𝑝1 D = AR = MR
QUANTITY

COST /
REVENUE
AVC
𝑝1 D = AR = MR
QUANTITY

COST / ATC
REVENUE
AVC
𝑝1 D = AR = MR
QUANTITY

MC ATC
COST /
REVENUE
AVC
𝑝1 D = AR = MR
QUANTITY

MC ATC
COST /
REVENUE
AVC
𝑝1 D = AR = MR
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝑝1 D = AR = MR
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝑝1 D = AR = MR
𝐴𝑉𝐶 1
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴 𝐹𝐶 1 𝑝 1 D = AR = MR
𝐴𝑉𝐶 1
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴𝑉𝐶 1
TR
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴𝑉𝐶 1
TC
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴 𝐹𝐶 1 𝑝 1 FC D = AR = MR
𝐴𝑉𝐶 1
VC
QUANTITY
𝑞1
MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴 𝐹𝐶 1 𝑝 1 𝚷< 𝟎 D = AR = MR
𝐴𝑉𝐶 1
QUANTITY
𝑞1
LOSS IF THE FIRM
STAYS IN BUSINESS MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴 𝐹𝐶 1 𝑝 1 𝚷< 𝟎 D = AR = MR
𝐴𝑉𝐶 1
QUANTITY
𝑞1
LOSS IF THE FIRM
SHUTS DOWN MC ATC
COST /
REVENUE
AVC
𝐴𝑇 𝐶 1
𝐴 𝐹𝐶 1 𝑝 1 FC D = AR = MR
𝐴𝑉𝐶 1
QUANTITY
𝑞1

COST /
REVENUE
QUANTITY

MC ATC
COST /
REVENUE AVC
QUANTITY

MC ATC
COST /
REVENUE AVC
SHUT DOWN
PRICE
QUANTITY

EXIT PRICE IN THE LONG-RUN
 In the LR, a firm exits (i.e. leaves the market once and for all) if the price falls
below the minimum of the ATC.
 In the LR, a firm will stay in the market only if she can cover all costs (i.e. both FC
and VC) and make at least normal profit.
 Firm’s profit if it exits:

=0
 Firm’s profit if it stays in business:
= TR - TC
 The firm is better off staying in the market so long as
> = TR > TC AR = P > ATC

EXIT PRICE IN THE LR

COST /
REVENUE
QUANTITY

MC ATC
COST /
REVENUE AVC
QUANTITY

MC ATC
COST /
REVENUE AVC
EXIT
PRICE
QUANTITY

EFFICIENCY R
REMINDERS
 Economic Efficiency (EE) is achieved when all scarce resources are used in the
best possible way so the greatest possible level of infinite wants is being met.
 EE requires both Productive Efficiency (PE) and Allocative Efficiency (AE).
EE = PE + AE
 PE is achieved at the level of output at which the firm’s ATC is minimized.
PE : Q = QPE
 Allocatively Efficient (AE) is achieved at the level of output at which the MB of

consumption (i.e. the demand price) is equal to the MC of production.
AE : MB = MC PD = MC

PERFECT COMPETITION & EFFICIENCY
 In the SR,
 P = MC (i.e. MB = MC)  ALLOCATIVE EFFICIENCY
 Q QPE  PRODUCTIVE INEFFICIENCY
 ECONOMIC INEFFICIENCY
 In the LR,
 P = MC (i.e. MB = MC)  ALLOCATIVE EFFICIENCY
 Q =QPE  PRODUCTIVE EFFICIENCY
 ECONOMIC EFFICIENCY
 Nb: Though very unlikely, EE would be achieved in the SR if the market price is
exactly equal to the minimum of the ATC.

PERFECT COMPETITION & SUPPLY CURVES
 A supply curve indicates the quantity of output that a price-taking firm or
industry is willing to offer, at any given price, in order to maximize profit.
 Reminders:
 Firms maximize profit when they supply the quantity of output at which MR = MC.
 In perfect competition, each individual firm is price-taker so MR = P.
 The condition MR = MC is necessary but not sufficient.
 In the SR, a firm shut downs if the price falls below the minimum of the AVC.
 In the LR, a firm exits if the price falls below the minimum of the ATC.

 The level of output at which MR = MC maximizes the firm’s profit if the MC curve
is locally increasing.
 If the MC curve is locally decreasing at that level of output, then the firm’s profit
is actually minimized.
 Proof: A level of output that satisfies MR = MC maximizes the firm’s profit so

long as profit is locally concave, that is, whenever its second-order derivative is
negative.

 In the SR,
 The individual supply curve is given by the increasing section of the MC curve
which lies above the minimum of the AVC.
 The market supply curve is the horizontal sum of the individual supply curves,
taking the number of firms in the industry as given.
 In the LR,
 The individual supply curve is given by the increasing section of the MC curve
which lies above the minimum of the ATC.
 The market supply curve is the horizontal sum of the individual supply curves, after
all entry and exit have taken place.
 In a constant-cost industry, the market supply curve is perfectly price-elastic at the
minimum of the ATC.

SHORT-RUN INDIVIDUAL SUPPLY CURVE

COST /
PRICE
QUANTITY

COST / MC
PRICE ATC
AVC
QUANTITY

COST / MC
PRICE ATC
AVC
SHUT DOWN
PRICE
QUANTITY

COST / SRIS
PRICE ATC
AVC
MC
SHUT DOWN
PRICE
QUANTITY

SHORT-RUN MARKET SUPPLY CURVE ONE STEP
FURTHER

FURTHER
COST /
PRICE
QUANTITY
INDIVIDUAL FIRM

FURTHER
MC
COST /
PRICE AVC
QUANTITY
INDIVIDUAL FIRM

FURTHER
MC
COST /
PRICE AVC
0 QUANTITY
INDIVIDUAL FIRM

FURTHER
MC
COST /
PRICE AVC
10
0 20 QUANTITY
INDIVIDUAL FIRM

FURTHER
MC
COST /
PRICE AVC
20
10
0 20 25 QUANTITY
INDIVIDUAL FIRM

FURTHER
SRIS
COST /
PRICE MC AVC
20
10
0 20 25 QUANTITY
INDIVIDUAL FIRM

FURTHER
SRIS PRICE
COST /
PRICE MC AVC
20
10
0 20 25 QUANTITY QUANTITY
INDIVIDUAL FIRM MARKET

x200
FURTHER
SRIS PRICE
COST /
PRICE MC AVC
20
10
0 20 25 QUANTITY 0 400 500 QUANTITY

x200
FURTHER
SRIS PRICE SRMS

COST /
PRICE MC AVC
20
10
0 20 25 QUANTITY 0 400 500 QUANTITY

x200
LONG-RUN INDIVIDUAL SUPPLY CURVE

COST /
PRICE
QUANTITY

COST / MC
PRICE ATC
AVC
QUANTITY

COST / MC
PRICE ATC
AVC
EXIT
PRICE
QUANTITY

COST / LRIS
PRICE ATC
AVC
MC
QUANTITY

LONG-RUN MARKET SUPPLY ONE STEP
FURTHER

FURTHER
PRICE
QUANTITY
MARKET

FURTHER
SRMS1
PRICE
QUANTITY
MARKET

FURTHER
D1 SRMS1
PRICE
QUANTITY
MARKET

FURTHER
D1 SRMS1
PRICE COST /
REVENUE
QUANTITY QUANTITY

FURTHER
D1 SRMS1
PRICE COST / AVC
REVENUE
QUANTITY QUANTITY

FURTHER
D1 SRMS1 ATC
PRICE COST / AVC
REVENUE
QUANTITY QUANTITY

FURTHER
D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
QUANTITY QUANTITY

FURTHER
D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1

FURTHER
D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1

FURTHER
D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1

FURTHER
D1 SRMS1 MC ATC
PRICE COST / NORMAL AVC
REVENUE PROFIT
𝑝1 AR1 = MR1

FURTHER
D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1
𝑝2
𝑄𝑄
2 1 QUANTITY 𝑞1 QUANTITY

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄𝑄
2 1 QUANTITY 𝑞1 QUANTITY

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄𝑄
2 1 QUANTITY 𝑞 2𝑞1 QUANTITY

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝐴 𝑇𝐶2
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄𝑄

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝐴 𝑇𝐶2
𝑝1 AR1 = MR1
𝑝2
𝚷< 𝟎 AR2 = MR2
𝑄𝑄

FURTHER
D2 D1 SRMS1 MC ATC
PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄𝑄

FURTHER
D2 D1 SRMS2 SRMS1 MC ATC

PRICE COST / AVC
REVENUE
𝑝1 AR1 = MR1
𝑝2 AR2 = MR2
𝑄𝑄

FURTHER

PRICE COST / AVC
REVENUE
𝑝 1=𝑝 3 AR1 = MR1
𝑝2 AR2 = MR2
𝑄𝑄
3 𝑄

FURTHER

PRICE COST / AVC
REVENUE
𝑝 1=𝑝 3 AR1/3 = MR1/3
𝑝2 AR2 = MR2
𝑄𝑄
3 𝑄

FURTHER

PRICE COST / AVC
REVENUE
𝑝31
𝑝 1=𝑝 AR1/3 = MR1/3
𝑝2 AR2 = MR2
𝑄𝑄
3 𝑄
2 1 QUANTITY 𝑞 2𝑞1 =𝑞3 QUANTITY

FURTHER

PRICE COST / NORMAL AVC
REVENUE PROFIT
𝑝 1=𝑝 3 AR1/3 = MR1/3
𝑝2 AR2 = MR2
𝑄𝑄
3 𝑄

FURTHER

PRICE COST / AVC
REVENUE
LRMS
𝑝 1=𝑝 3 AR1/3 = MR1/3
𝑝2 AR2 = MR2
𝑄𝑄
3 𝑄

PRACTICE TIME!
The following figure shows the SR cost curves for a firm that is operating in a perfectly
competitive market.
MC
COSTS ATC
AVC
QUANTITY

PRACTICE TIME!
 Questions:
 At what price would the firm just make normal profit?
 What area would represent the FC at this price?
 What is the shutdown price for the firm?
 Within what range of prices would the firm choose to operate at a loss in the SR?
 Within what range of prices would the firm be able to make abnormal profits in the SR?
 Identify the firm’s SR supply curve.

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
QUANTITY

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
Π =0 𝑝0
QUANTITY
𝑞0

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
Π =0 𝑝0
𝐴 𝑇 𝐶0
QUANTITY
𝑞0

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
Π =0 𝑝0
𝐴 𝑇 𝐶0
FC
QUANTITY
𝑞0

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
Π =0 𝑝0
𝐴 𝑇 𝐶0 FC
𝑝
QUANTITY
𝑞0

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
𝑝0
Π =0
− 𝐹𝐶<Π <0 𝐴 𝑇 𝐶 FC
0
QUANTITY
𝑞0

PRACTICE TIME!
COST / MC
PRICE ATC
AVC
Π >0
𝑝0
Π =0
0
QUANTITY
𝑞0

PRACTICE TIME!
COST / S
PRICE ATC
AVC
Π >0
𝑝0
Π =0
0
QUANTITY
𝑞0

MCQS

MCQS

MCQS

ESSAY QUESTIONS

A-Level Economics - The Price System and The Micro Economy (Perfect Competition)

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14

THE PRICE SYSTEM & THE MICRO

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

 In perfect competition, the market price is determined by the market forces of

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

 Hence, the individual demand facing a perfectly competitive firm is perfectly

 Consequently, a perfectly competitive firm will never charge a price below

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

 However, as we explained earlier, a perfectly competitive firm has no incentive

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

 Therefore, the MR of a perfectly competitive firm is equal to the market price

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

 Nb: Compared to the SR equilibrium, the LR market equilibrium output is larger

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

 This leads to a decrease in the market supply and to an increase in the

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

Dr. Sylvain Hours - postmaster@econdoctor.com - Wechat: sylvainhoursCN - econdoctor.com

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

MARKET INDIVIDUAL FIRM

𝑄 2 𝑄1 QUANTITY 𝑞1𝑞 2 QUANTITY

MARKET INDIVIDUAL FIRM

𝑄 2 𝑄1 QUANTITY 𝑞1𝑞 2 QUANTITY