101chapter7
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Perfect competition is characterized by many small firms, identical products, free entry and exit. In the short run, firms are price takers and maximize profits by producing where marginal revenue equals marginal cost. This can result in economic profits or losses. In the long run, entry and exit of firms drives economic profits to zero through adjustments to supply.
101chapter7
- 1. Chapter 7. Perfect CompetitionChapter 7. Perfect Competition What is it? Firm behavior Short run Long run
- 2. Perfect CompetitionPerfect Competition many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage
- 3. examplesexamples wheat farming dry cleaning paper cups
- 4. Firm BehaviorFirm Behavior maximize profits TR > TC economic profits TR = TC normal profits
- 5. Firm is price takerFirm is price taker cannot influence price take price as given, choose Q firm demand is perfectly elastic horizontal line MR = P firm sells all it wants at price, P
- 6. Profit maximizingProfit maximizing firm chooses Q to max profits where TR - TC is largest -- where MR = MC why MR = MC? MR > MC -- output adding to profit MR < MC -- output taking away from profit
- 7. Market for syrup (all firms)Market for syrup (all firms) P Q (cans/day) D S $8 100
- 8. Firms demand, cost curveFirms demand, cost curve P Q (cans/day) $8 D = MR = P MC 10
- 9. firm is price taker what if price too low to earn profit? economic loss will firm exit?
- 10. costs & exitcosts & exit firm will stay, in SR, if P > AVC why? if firm exits, loses TFC if P = AVC -- loss from staying = loss from exit
- 11. SR equilibriumSR equilibrium two cases economic profit economic loss
- 12. Case 1: economic profitCase 1: economic profit P = $8, Q = 10 ATC = $5 profit = ($8)(10) - ($5)(10) = $30
- 13. P Q (cans/day) $8 D = MR = P MC 10 ATC $5 economic profit
- 14. case 2: economic losscase 2: economic loss P = $3, Q = 7 ATC = $5 profit = ($3)(7) - ($5)(7) = - $14
- 15. P Q (cans/day) $3 D = MR = P MC 7 ATC $5 economic loss
- 16. 12.3 LR Equilibrium12.3 LR Equilibrium entry & exit of firms firms earn normal profit economic profit will be zero
- 17. why zero economic profit?why zero economic profit? if economic profit > zero firms enter (S shifts right) price falls profit falls to zero
- 18. P Q (cans/day) D S $8 100 S $5 120 market for syrupmarket for syrup
- 19. Syrup firmSyrup firm P Q (cans/day) D = MR = P MC ATC $5 zero economic profit
- 20. if economic profit < zero firms exit (S shifts left) price rises profit rises to zero
- 21. P Q (cans/day) D S $5 120 market for syrupmarket for syrup $3 140 S
- 22. P Q (cans/day) $3 D = MR = P MC 7 ATC $5 economic loss
- 23. Syrup firmSyrup firm P Q (cans/day) D = MR = P MC ATC $5 zero economic profit
- 24. Shifts in market demandShifts in market demand change price in SR profits or losses in LR affect exit/entry return to zero economic profit
- 25. SummarySummary price takers MR = MC determines equilibrium Q SR: economic profit or loss LR: economic profit is zero due to entry/exit