Perfect Competition Flashcards
Perfect Competition (industry structure)
-lots of firms
-product must be identical
-perfect information for consumers
-freedom of entry and exit
(this model is seen as ideal, but nearly impossible to come across, closest example is agricultural market)
demand curve of perfectly competitive firm
straight horizontal curve
MR for Perfect Comp
MR=D
Short run profit maximization
- the point where MC X MR
- in example with 2 intersections: second time MC X MR
the shutdown decision
price
- if price>VC@Q* produce Q*
- if price
2 step profit maximizing rule
1) find Q* (where MR X rising MC)
2) @ Q, compare price and AVC
—> if price>AVC, produce Q
—> if price
industry’s short run supply curve
- tells what industry will supply at a given price
- Q industry=sum of Q of all firms at the given price
short run equilibrium
-at e (where MC X MR for a single firm, equilibrium point for industry) econ profit is either + or -
econ profit for firm (short run)
Q(p-ATC)
- Q is always pos.
- if p>ATC, econ profit is + (visa versa)
entry exit decision
- long run only
- if econ profit is -, exit from industry (if persistent)
- if econ profit is +, entry to industry (only if true for whole industry)
long run equilibrium
- price=min LRAC
- all firms must produce at this price
- econ profit=0
Constant Cost Case
- LRAC remains constant
- firms move up SRS curve, then prices fall
- LRS curve is flat horizontally, price falls to this point, causing demand curve to shift left
- LRS curve is perfectly elastic
increasing cost case
- demand shifts right
- econ profit is +, leads to entry
- input prices inc. (industry demand for inputs inc.)
- cost of production inc. for every firm
- LRAC drifts up
- LRS is more elastic than SRS but not perfectly elastic
requirements for horizontal long run industry supply curve
1) identical costs
2) as industry grows, input prices stay the same
