Perfect Competition

Question 1

The Theory of Perfect Competition

Answer 1

1) All firms in the market sell a homogeneous product. (A product from firm A is a perfect substitute for a product from firm B)
2) Consumers and producers know the nature of the product being sold and the prices charged by each firm (Consumers and producers cannot be fooled)
3) There are many buyers and sellers in the makers for this product
4) The industry is characterized by freedom of exit
5) Individual firms are price takers. That is an individual firm has no power to influence the market through which its product is being sold.

Question 2

Profit Maximization in the Short Run

Answer 2

We know that profit maximization occurs at the Quantity where MR = MC

Thus, in a perfectly competitive market, an individual producer maximizes profits at the QUANTITY where P=MR=MC or where P=MC

Question 3

How to Calculate Market Supply

Answer 3

Just horizontally sum individual supply curves

Question 4

Long Run Equilibrium in a Perfectly Competitive Market

Answer 4

In the long run, firms can exit the market or firms can enter the market

Entry will continue until profits EQUAL 0

Profits = 0 where MC intersects with ATC

Question 5

Short Run Exit and Entry

Answer 5

In the long run, Profit 0 will induce entry

Question 6

Constant Cost Industry

Answer 6

Per unit costs do not change as firms enter the market