Perfect Competition

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Perfect Competition

• By Kayleigh Verney

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The 5 characteristics to Perfect Competition

• All firms are price takers
• All firms sell a homogeneous product
• A large number of buyers and sellers
• NO barriers to entry
• Perfect information

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Farms!
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Supply and Demand inPC
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Profit Maximization
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Where do you want to be?

• MRMC PROFIT MAXIMIZATION !
• MRgtMC revenue is increasing faster than cost, so
  production should increase.
• MRltMC revenue is below marginal cost, so
  production should slow down.

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Elasticity in Perfect Competition

• In a perfect competition firm the demand is
  perfectly elastic because they are price
  takers. The definition of a price taker is a
  industry or firm who has no affect of influence
  on the price of an item.
• EX In New Paltz it seems like there are hundreds
  of pizzerias and because of that a slice of pizza
  from all of them have to cost relatively the same
  . So La Bellas cant have a slice of pizza
  costing 2 while Rinos is only charging 1.25 ,
  because everyone would just go to Rinos meaning
  New Paltz Pizzerias could be part of the
  Perfectly Competitive market.

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Eco-Art
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(No Transcript)
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A perfectly competitive firm should always

• A. Earn an economic profit.B.Increase its price
  if it is experiencing an economic loss.C.
  Produce the quantity where its marginal cost
  equals its marginal revenue.D. Produce at the
  productively efficient level of output.

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The Answer is

• c
• In order to reach profit maximization MR
  must MC

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A firm in a perfectly competitive firm has

• A. a perfectly elastic supply curve.B. a
  perfectly elastic demand curve.C. a negatively
  sloped demand curve.D. a positively sloped
  demand curve.

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The Answer is.

• B
• In a Perfectly Competitive firm the demand Curve
  is PERFECTLY elastic because in the firm you are
  a price taker.

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Which of the following is not a valid option for
a perfectly competitive firm?

• A. Increasing its output.B. Decreasing its
  output.C. Increasing its price.D. Increasing
  its resources.

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The Answer is

• c
• Only Price Makers can in crease their prices
  like Monopolies or Oligopolies.

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2010 AP MICROECONOMICS FREE-RESPONSE QUESTIONS

• 1. Assume that corn is produced in a perfectly
  competitive market. Farmer Roy is a typical
  producer of corn.
• (a) Assume that Farmer Roy is making zero
  economic profit in the short run. Draw a
  correctly labeled side-by- side graph for the
  corn market and for Farmer Roy and show each of
  the following.
• (i) The equilibrium price and quantity for
  the corn market, labeled as P M1 and QM1,
  respectively
• (ii) The equilibrium quantity for Farmer
  Roy, labeled as Q F1
• (b) For Farmer Roys corn, is the demand
  perfectly elastic, perfectly inelastic,
  relatively elastic, relatively inelastic, or unit
  elastic? Explain.
• (c) Corn can be used as an input in the
  production of ethanol. The demand for ethanol has
  significantly increased.
• (i) Show on your graph in part (a) the effect
  of the increase in demand for ethanol on the
  market price and quantity of corn in the short
  run, labeling the new equilibrium price and
  quantity as P M2 and QM2, respectively.
• (ii) Show on your graph in part (a) the effect
  of the increase in demand for ethanol on Farmer
  Roy quantity of corn in the short run, labeling
  the quantity as Q F2.
• (iii) How does the average total cost for
  Farmer Roy at Q F2 compare with PM2?
• (d) Corn is also used as an input in the
  production of cereal. What is the effect of the
  increased demand for ethanol on the equilibrium
  price and quantity in the cereal market in the
  short run? Explain.
• ANSWER ON BOARD

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Real World Links

• http//www.perfectcompetition.net/
• http//faculty.lebow.drexel.edu/McCainR//top/prin/
  txt/Comp/PC2.html