Final - Perfect Competition Flashcards
3 Main Assumptions in PC
- Market is made up of many small players who cant individually influence the market
- Product is considered to be standarized by consumers
- Free entry and exit
Individual Firm demand graph shape
- Completely horizontal line
- since they don’t supply all costumers
Total Revenue Equation
TR = Price x Quantity
Marginal Revenue
(same as individual demand curve)
Change in TR
——————-
change in q
In PC markets, it is equivalent to price
2 step process for profit maximizing
- Find the positive output level that maximizes the firm’s profit
- Check if q=0 (shutting down but NOT EXITING bc short term) produces more profit
How to find the best output level
By finding where MC = MR // MC = p
(where MR = price bc PC)
AND
where MR is increasing
2 Possible productions in the SR
- q>0 where MC=p and MC is increasing
- q=0 (where profit = -FC)
*shut down but hasn’t exited market
When should a firm shut down in the SR?
When
AVTmin cost > price
what is MC equivalent to?
Supply
Characteristics of Market supply in the short run
- fixed number of firms
- line in a graph will get flatter as more firms join but will always be upwards sloping
What, graphically, is the optimal short-run production?
Intersection between MC and AVC
Equation for firm profit in the short run?
q(p-ATC)
What is needed for profit to be positive?
(SR)
Price > ATC min
What happens when
Price < ATC min
Price > AVC min
- profit is negative but the firm shouldn’t shut down yet
What happens if Price = ATC min
Firm breaks even but makes no profit
2 possible productions in the LR
- q>0 where p=MC(LR) and the average marginal cost long run is higher than 0
- q=0, exit the market
When should a firm exit the market in the LR?
–> If doing to would generate a higher profit than staying in
ATC(LR)(Min) > P
What is each firm’s profit when in market equilibrium?
Profit = 0
- Bc if it were positive, more firms would notice, come in, inc. supply and decrease price
- And if it were negative, firms would leave, dec. supply and increase price
Equation for market eq?
p = ATC(LR)(Min)
Where does each firm operate graphically in long term equilibrium?
On their min point on the ATC(LR) curve
What would happen if demand in a PC market suddenly increased?
- Short run eq $ and quantity would rise, firms would gain positive profit
- Long run, other firms would notice and join the market
- This would increase supply and decrease eq price back to its original
- though eq quantity would be higher
- firms go back to gaining negative profit
How does a surge in demand affect individual firms?
- In the short run, they go up in their MC curve to produce more and keep up with the demand
- Gain positive profit
- But long run, go back down MC curve
