Perfect Competition

1
Perfect Competition
Costs
and
Unit 3 Theory of the Firm
Part 2
2
In the previous lecture we learned about the
economic model of ..
Perfect Competition
1. Many buyers and sellers
2. All the products are homogeneous.
3. All buyers sellers are price takers.
4. There are NO barriers to entry.
5. There is perfect information.
6. Firms cannot earn economic profits in the
long run.
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3
cost
P
firm
S
industry
P
p
MRDARP
D
Q
Q
quantity
How do we label the demand curve for the
individual firm?
What does each of these abbreviations stand for?
Briefly, why is each equal to the other?
4
cost
P
firm
S
industry
MC
P
p
MRDARP
D
Q
Q
q
quantity
How does the individual firm determine where it
will produce?
A firm maximizes profits where MC MR
How does this relate to making decisions on the
margin?
5
cost
P
firm
S
industry
MC
P
p
MRDARP
D
Q
Q
q
quantity
Where MC MR is the point of allocative or
economic efficiency for our economy.
when resources are distributed in a way to
maximize utility here the cost of the next one
is equal to the price (value) of the next one (P
MC) both the firm and the consumer are getting
the max that they can
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6
cost
P
market
firm
ATC
MC
S
AVC
MRDARP
p
P
some AFC covered
D
AVC covered
Q
Q
q
quantity
MC MR
Where will this firm produce?
Is this firm making an economic profit?
No
Should this firm shut down?
No
Why not?
B/c at point q it is covering all of its AVC and
some of its sunk costs (AFC)
7
cost
P
market
firm
ATC
MC
S
AVC
MRDARP
p
P
p2
D
Q
Q
quantity
Price must fall to what level for the firm to
shutdown?
shutdown point where MC MR AVC
8
cost
firm
P
market
MC
ATC
S
AVC
MRDARP
p
P
D
Q
Q
q
quantity
Is the above firm making a profit?
It is making a normal profit b/c a normal profit
is figured into the cost of doing business but
it is not making an economic profit it is at
equilibrium output price
9
cost
firm
P
market
MC
ATC
S
AVC
MRDARP
p
P
D
Q
Q
q
quantity
The above firm is producing at productive (or
technical) efficiency..
where it is operating at its minimum ATC
here it is producing goods for society at the
very lowest cost of resources for society
explain why
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