09 Mill Micro1ce PPT ch09

ECONOMICS TODAY
A Canadian Perspective Microeconomics, First Edition
Chapter 9
Perfect Competition
Copyright © 2023 Pearson Canada Inc. 9-1

INTRODUCTION
• The agriculture industry in Canada displays

many characteristics of a perfectly competitive
market. Canadian farmers are the individual
firms that must choose which crops to grow
every year. There are no restrictions to enter or
exit these markets.
• In this chapter, you will learn how grain farmers
can pivot to maximize profit. First, though, you
must learn about one particularly important
approach to analyzing how firms compete,
which is known as the theory of perfect
competition.

LEARNING OBJECTIVES
9.1 Identify the characteristics of a perfectly competitive market structure
9.2 Discuss how a perfectly competitive firm decides how much output to
produce
9.3 Understand how the short-run supply curve for a perfectly competitive
firm is determined
9.4 Explain how the equilibrium price is determined in a perfectly

competitive market
9.5 Describe what factors induce firms to enter or exit a perfectly

competitive industry

CHAPTER OUTLINE
9.2 Profit-
9.1 Characteristics
Maximizing 9.3 Short-Run
of a Perfectly
Choices of a Supply under
Competitive Market
Perfectly Perfect Competition
Structure
Competitive Firm
9.4 Price
9.5 The Long-Run
Determination
Industry Situation:
under Perfect
Exit and Entry
Competition

DID YOU KNOW THAT ...
• when scrap metal prices hit a 15-year low in

Canada, many metal-scrapyard firms halted
operations— in some cases temporarily but in
many on a permanent basis?
• In this chapter, you will learn why it is that
significant price declines can induce some
firms to shut down temporarily while causing
others to exit the industry entirely.

9.1 CHARACTERISTICS OF A PERFECTLY
COMPETITIVE MARKET STRUCTURE
Perfect competition
• A market structure in which the decisions of individual buyers

and sellers have no effect on market price
Perfectly competitive firm
• A firm that is such a small part of the total industry that it

cannot affect the price of the product or service it sells
Price taker
• A perfectly competitive firm that must take the price of its

product as given because the firm cannot influence its price

Why a perfect competitor is a price taker:
9.1
CHARACTERI 1. There are a large number of buyers and
STICS OF A sellers.
PERFECTLY
COMPETITIVE 2. The product sold by the firms in the industry
is homogeneous—that is, indistinguishable
across firms.
3. Both buyers and sellers have access to all
relevant information.
4. Any firm can enter or leave the industry
without serious impediments.

AI—DECISION MAKING THROUGH DATA:
ACCESSING ALL RELEVANT
INFORMATION FOR “DYNAMIC PRICING”
• These days, many gasoline sellers are using

digital links to networks and machine-learning
tools such as AI-guided “dynamic pricing” to
instantaneously process real-time information
updates.
• With better access to relevant information for
competing firms, the retail gasoline industry has
been transformed into a more nearly perfectly
competitive industry.

A perfectly competitive firm is a
price taker where the forces of
market supply and demand
determine the market price.
9.2 PROFIT-
MAXIMIZING The perfectly competitive firm is a
CHOICES OF price taker, selling a homogeneous
commodity that is indistinguishable
A PERFECTLY across all firms in the industry.
COMPETITIV • Will sell all units for $5.
E FIRM (2 OF • Will not be able to sell at a higher price.
10) • Will face a perfectly elastic demand curve at
the going market price.

FIGURE 9-1 THE DEMAND CURVE FOR
A PRODUCER OF WIRELESS EARBUDS
At $5—where market demand, D, and market supply S, intersect
• The individual firm faces a perfectly elastic demand curve, d.
• If the firm raises its price even one penny, it will sell no wireless earbuds.
• Notice the difference in the quantities of wireless earbuds represented on

the horizontal axes of panels (a) and (b).
Copyright © 2023 Pearson Canada Inc. 9 - 10

9.2 PROFIT-MAXIMIZING CHOICES OF
A PERFECTLY COMPETITIVE FIRM
A perfect competitor accepts a price as given.
• If the firm raises its price, it sells nothing.

• If the firm lowers its price, it earns less revenues than it otherwise would.
A perfect competitor has to decide how much to produce.
• A firm uses the profit-maximization model.
The model assumes that firms attempt to maximize their

total profits:
• The positive difference between total revenues and total costs
The model also assumes that firms seek to minimize

losses:
• Revenues less than total costs
Profit = Total revenue (TR) – Total cost (TC)
TR = P x Q TC = TFC +
9.2 PROFIT- TVC
• Total revenues
MAXIMIZING
• The price per unit times the total
CHOICES OF quantity sold
A PERFECTLY • The same as total receipts from the
COMPETITIV sale of output
E FIRM • P is determined by the market in
perfect competition.
• Q is determined by the producer to
maximize profit.

FIGURE 9-2 PROFIT MAXIMIZATION, PANEL (A)

FIGURE 9-2 PROFIT MAXIMIZATION, PANEL (B) & (C)
Profit-maximizing rate of production

• The rate of production that maximizes total
profits, or the difference between total
revenues and total costs
• Also, the rate of production at which

marginal revenue equals marginal cost

9.2 PROFIT-MAXIMIZING CHOICES OF A
PERFECTLY COMPETITIVE FIRM
• Marginal revenue Change in Total Revenues (TR)

MR 
• The change in total revenues divided Change in output (Q)
by the change in output
• Marginal cost Change in Total Cost (TC)

MC 
• The change in total cost divided by Change in output (Q)
the change in output
Profit maximization occurs at the rate of output at which marginal revenue equals marginal cost
MR = MC
Undertake any activity up to the point in which the marginal benefit equals the marginal cost.

9.3 SHORT-RUN SUPPLY UNDER
PERFECT COMPETITION
To find out what our competitive individual producer

of wireless earbuds is making in terms of profits in
the short run
• We must determine the excess price above the
average total cost.
• From Figure 9-2 above
• If we have production and sales of 7 wireless
earbuds
• TR = $35, TC = $30, and profit = $5 per hour.
• Now we take info from column 6 in Panel (a) and add

it to Panel (c) to get Figure 9-3.

FIGURE 9-3 MEASURING TOTAL SHORT-RUN
PROFITS
Graphical depiction of
maximum profits and
graphical depiction of
minimum losses:
• The height of the rectangular

box in Figure 9-3 represents
profits per unit.
• The length represents the

number of units produced.
• When we multiply these two

quantities, we get total
economic profits.
Short-run average profits are determined by comparing ATC with P =

MR = AR at the profit-maximizing Q.
In the short run, a perfectly competitive firm can make either economic
profits or economic losses.

FIGURE 9-4 MINIMIZATION OF SHORT-RUN LOSSES
We see in Figure 9-4 that the

marginal revenue (d2) curve is
intersected (from below) by the
marginal cost curve at an
output rate of 5 wireless
earbuds per hour.
• The firm is clearly not making

profits because average total
costs at that output rate are
greater than the price of $3
per wireless earbud.
• The losses are shown in the

shaded area.
In situations in which average total costs exceed price, which, in turn, is greater than or
equal to average variable cost, profit maximization is equivalent to loss minimization.
• Losses are minimized at the output rate at which marginal cost equals marginal
revenue. Losses are shown by the red-shaded area.

PERFECT COMPETITION (6 OF 13)
• What do you think?
• Would you continue to produce if you were incurring a loss:
• In the short run?
• In the long run?

• As long as total revenues from continuing to

produce output exceed the associated variable
costs, the firm will continue to produce.
• A firm goes out of business when the owners
sell its assets; a firm temporarily shuts down
when it stops producing but is still in business.
• As long as the price per unit sold exceeds the
average variable cost per unit produced, the
earnings of the firm’s owners will be higher if it
continues to produce in the short run than if it
shuts down.

PERFECT COMPETITION
Short-run break-even price Short-run shutdown price
• The price at which a firm’s • The price that just covers
total revenues equal its average variable costs
total costs • It occurs just below the
• At the break-even price, the intersection of the
firm is just making a marginal cost curve and
normal rate of return on its the average variable cost
capital investment (It’s curve
covering its explicit and
implicit costs.)
Remember that when economic profits are zero, a firm can still have
positive accounting profits.

FIGURE 9-5 SHORT-RUN BREAK-
EVEN & SHUTDOWN PRICES
Short-run break-even price

• Price at which a firm’s
total revenues equal its
total costs
Short-run shutdown price
• The price below the

intersection of the
marginal cost curve and
the average variable cost
curve

The short-run break-even price increases.
WHAT HAPPENS WHEN
A NEW REGULATION
CAUSES THE MARGINAL The lowest price at which it will be able to
COST CURVE (HENCE, THE ensure at least a zero economic profit will be
AVERAGE TOTAL COST higher.
AND VARIABLE COST
CURVES)TO SHIFT
UPWARD The short-run shut down price increases, so
the lowest price at which the firm will be
THEREBY ALTERING THE able to earn sufficient revenues to at least
SHORT-RUN BREAK-EVEN cover its variable cost will also be higher.
AND SHUTDOWN PRICES?

FIGURE 9-6 THE INDIVIDUAL FIRM’S SHORT-
RUN SUPPLY CURVE
The individual
firm’s short-run
supply curve is
the portion of its
marginal cost
curve at and
above the
minimum point on
the average
variable cost
curve.

FIGURE 9-7 DERIVING THE INDUSTRY SUPPLY CURVE
Factors that influence

the industry supply
curve:
• Firm’s productivity
• Factor costs (wages,
prices of raw
materials)
• Taxes and subsidies
• Number of sellers
Marginal cost curves at and above minimum average variable cost are presented
in panels (a) and (b) for firms A and B.
• We horizontally sum the two quantities supplied, 7 units by firm A and 10 units by firm
B, at a price of $6. This gives us point F in panel (c).
• We do the same thing for the quantities supplied at a price of $10. This gives us point G.
• When we connect those points, we have the industry supply curve, S, which is the
horizontal summation—represented by the Greek letter sigma ()—of the firms’ marginal
cost curves above their respective minimum average variable costs.

9.4 PRICE DETERMINATION UNDER
• Question:
• How is the market, or “going,” price established in a competitive
market?
• Answer:
• This price market, or “going,” price is established by the interaction
of all the suppliers (firms) and all the demanders (consumers).

9.4 PRICE DETERMINATION UNDER
• This price market, or “going,” price is established by the

interaction of all the suppliers (firms) and all the demanders
(consumers).
• The competitive price is determined by the intersection of
the market demand curve and the market supply curve.
• The market supply curve is equal to the horizontal summation of the
supply curves of the individual firms.

FIGURE 9-8 INDUSTRY DEMAND AND SUPPLY CURVES
AND THE INDIVIDUAL FIRM DEMAND CURVE, PANEL (A)
AND (B)
• The market or
“going,” price is
established by the
interaction of all the
suppliers (firms) and
all the demanders
(consumers).
• The competitive price is determined by the intersection of the

market demand curve and the market supply curve.
• The market supply curve is equal to the horizontal summation of

the supply curves of the individual firms.

• Profits and losses act as signals for
resources to enter an industry or to leave
9.5 THE an industry.
LONG-RUN • Signals
INDUSTRY • Compact ways of conveying to economic
SITUATION decision-makers information needed to make

decisions
: EXIT AND • An effective signal not only conveys
ENTRY information but also provides an incentive to
react appropriately

INTERNATIONAL EXAMPLE: REALLOCATING
PASSENGER AIRCRAFTS TO CARGO
AIRCRAFTS DURING THE PANDEMIC
• When the lockdowns caused by the COVID-

19 pandemic decimated the demand for
passenger air travel and subsequent cargo
transportation, which at the same time there
was an explosion of growth in the e-
commerce market, a huge shortage of cargo
aircraft transportation was created.
• By shifting their available resources to
accommodate cargo, the airline owners were
able to recover some of their revenue during
the pandemic.

9.5 THE LONG-RUN INDUSTRY
SITUATION: EXIT AND ENTRY
Exit and entry of firms:
• Economic profits:
• Signal resources to enter the market
• Economic losses:
• Signal resources to exit the market
In the long run, capital will flow into industries in which profitability is highest and will flow
out of industries in which profitability is lowest.
Allocation of capital and market signals:

• Price system allocates capital according to the relative expected rates of return on alternative investments.
• Investors and other suppliers of resources respond to market signals about their highest-valued opportunities.
Tendency toward equilibrium (note that firms are adjusting all the time)
• At break-even, resources will not enter or exit the market.
• In competitive long-run equilibrium, firms will make zero economic profits.

Long-run industry Constant-cost Increasing-cost Decreasing-cost

supply curve industry industry industry
• A market supply • An industry • An industry in • An industry in
curve showing whose total which a long-run which an increase
the relationship output can be increase in in industry output
between prices increased in the industry output is leads to a
and quantities long run without accompanied by reduction in input
after firms have an increase in an increase in prices
been allowed input prices input prices • Its long-run
time to enter or • Its long-run • Its long-run industry supply
exit from an supply curve is industry supply curve slopes
industry, horizontal curve slopes downward
depending on upward
whether there
have been
positive or
negative
economic profits
FIGURE 9-9 CONSTANT-COST, INCREASING-COST, AND
DECREASING-COST INDUSTRIES, PANEL (A)–(C)

EXAMPLE: ASSESSING THE LONG-RUN
INDUSTRY SUPPLY CURVE IN GROWING
THIRD-PARTY FOOD DELIVERY INDUSTRY
• Firms such as Skip the Dishes, Uber Eats, and

DoorDash have been joined by many new entrants to
compete in the industry of food delivery services.
• When restaurants’ dining-in options were closed
because of the spread of COVID-19, there was a huge
increase in the demand for third-party food delivery
services from locked-down consumers.
• As both market demand and supply of this industry
have increased, the market clearing price has
remained steady.
• Thus, the long-run supply curve is horizontal, and this
is a constant-cost industry.

FIGURE 9-10 LONG-RUN FIRM COMPETITIVE EQUILIBRIUM
In the long run, a firm can

change the scale of its plant,
adjusting its plant size in such a
way that it has no further
incentive to change; it will do
so until profits are maximized.
In the long run, a competitive

firm produces where price,
marginal revenue, marginal
cost, short-run minimum
average cost, and long-run
minimum average cost are
equal. This condition is
satisfied at point E.

Marginal cost pricing Market failure

• A system of pricing in • A situation in which an
which the price charged is unrestrained market
equal to the opportunity operation leads to either
cost to society of too few or too many
producing one more unit resources going to a
of the good or service in specific economic activity
question
• The opportunity cost is the
marginal cost to society

ECONOMICS IN YOUR LIFE: FOR URBAN
FARMERS, INDUSTRY ENTRY MAY BE
RELATIVELY UNIMPEDED BUT STILL
ENTAILS A KEY EXPENSE
• Urban land has many alternative uses, so that

the expense to lease the land for agricultural
use is higher than that in rural areas.
• However, urban farmers may incur a
relatively smaller entry expense in terms of
establishing links to consumers of their
products.
• Thus, the total entry expenses may be about
the same between urban and rural farmers.

ISSUES & APPLICATIONS: CANADIAN
FARMERS PIVOT AND PLANT MORE
DURUM WHEAT
• During COVID-19, the lockdowns forced

people to prepare more home-cooked meals
and sales of flour and pasta increased until
grocery store shelves were bare. The demand
for durum wheat to produce flour and pasta
increased, and so did the price.
• As a Canadian farmer, the decision to pivot to
more durum wheat was based on the rising
price.

SUMMARY DISCUSSION OF
LEARNING OBJECTIVES
9.1 Identify the characteristics of a perfectly competitive market structure
• Large number of buyers and sellers
• Homogeneous product
• Buyers and sellers have equal access to information
• No barriers to entry and exit
9.2 Discuss how a perfectly competitive firm decides how much output to
produce
• Economic profits are maximized when marginal cost equals marginal revenue.
The firm will continue to produce as long as the market price is not below the
short-run shutdown price, where the marginal cost curve crosses the average
variable cost curve.

LEARNING OBJECTIVES
9.3 Understand how the short-run supply curve for a perfectly
competitive firm is determined
• The rising part of the marginal cost curve above minimum average
variable cost
9.4 Explain how the equilibrium price is determined in a

perfectly competitive market
• The price at which the total amount of output supplied by all firms
is equal to the total amount of output demanded by all buyers

LEARNING OBJECTIVES
9.5 Describe what factors induce firms to enter or exit a perfectly
competitive industry
• Incentives to enter or exit a perfectly competitive industry:
• Economic profits induce entry of new firms
• Economic losses will induce firms to exit the industry
• The long-run industry supply curve and constant-, increasing-, and
decreasing-cost industries:
• The relationship between price and quantity after firms have been
able to enter or exit the industry
• Constant-cost industry: Horizontal long-run supply curve
• Increasing-cost industry: Upward-sloping long-run supply curve
• Decreasing-cost industry: Downward-sloping long-run supply curve

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ECONOMICS TODAY

A Canadian Perspective Microeconomics, First Edition

Copyright © 2023 Pearson Canada Inc. 9-1

• The agriculture industry in Canada displays

Copyright © 2023 Pearson Canada Inc. 9-2

9.1 Identify the characteristics of a perfectly competitive market structure

9.4 Explain how the equilibrium price is determined in a perfectly

9.5 Describe what factors induce firms to enter or exit a perfectly

Copyright © 2023 Pearson Canada Inc. 9-3

Copyright © 2023 Pearson Canada Inc. 9-4

• when scrap metal prices hit a 15-year low in

Copyright © 2023 Pearson Canada Inc. 9-5

• A market structure in which the decisions of individual buyers

Perfectly competitive firm

• A firm that is such a small part of the total industry that it

• A perfectly competitive firm that must take the price of its

Copyright © 2023 Pearson Canada Inc. 9-6

Copyright © 2023 Pearson Canada Inc. 9-7

• These days, many gasoline sellers are using

Copyright © 2023 Pearson Canada Inc. 9-8

Copyright © 2023 Pearson Canada Inc. 9-9

At $5—where market demand, D, and market supply S, intersect

• The individual firm faces a perfectly elastic demand curve, d.

• Notice the difference in the quantities of wireless earbuds represented on

Copyright © 2023 Pearson Canada Inc. 9 - 10

• If the firm raises its price, it sells nothing.

A perfect competitor has to decide how much to produce.

• A firm uses the profit-maximization model.

The model assumes that firms attempt to maximize their

The model also assumes that firms seek to minimize

Copyright © 2023 Pearson Canada Inc. 9 - 12

Copyright © 2023 Pearson Canada Inc. 9 - 13

Profit-maximizing rate of production

• Also, the rate of production at which

Copyright © 2023 Pearson Canada Inc. 9 - 14

• Marginal revenue Change in Total Revenues (TR)

• Marginal cost Change in Total Cost (TC)

Copyright © 2023 Pearson Canada Inc. 9 - 15

To find out what our competitive individual producer

• Now we take info from column 6 in Panel (a) and add

Copyright © 2023 Pearson Canada Inc. 9 - 16

• The height of the rectangular

• The length represents the

• When we multiply these two

Short-run average profits are determined by comparing ATC with P =

Copyright © 2023 Pearson Canada Inc. 9 - 17

We see in Figure 9-4 that the

• The firm is clearly not making

• The losses are shown in the

Copyright © 2023 Pearson Canada Inc. 9 - 18

Copyright © 2023 Pearson Canada Inc. 9 - 19

• As long as total revenues from continuing to

Copyright © 2023 Pearson Canada Inc. 9 - 20

Copyright © 2023 Pearson Canada Inc. 9 - 21

Short-run break-even price

Short-run shutdown price

• The price below the

Copyright © 2023 Pearson Canada Inc. 9 - 22

Copyright © 2023 Pearson Canada Inc. 9 - 23

Copyright © 2023 Pearson Canada Inc. 9 - 24

Factors that influence

Copyright © 2023 Pearson Canada Inc. 9 - 25

Copyright © 2023 Pearson Canada Inc. 9 - 26