Review of Chapter 7: Perfect Competition

Economic reasoning
1. AR=MR=P.
2. At the profit maximizing Q*, P=MR=MC.
3. A firm’s short run supply curve: MC above AVC.
4. A firm’s long run supply curve: MC above LAC.
5. Short run industry supply: sum of individual supply curves.
6. Long run industry supply: horizontal at P=minLAC (if firms are identical, input
prices are constant).
7. Long-run market equilibrium (identical firms, constant cost): zero economic
profit; P=MR=LMC=minLAC.
8. Profit maximization MR=MC is consistent with social surplus maximization
MB=MC because P=MB=MR.

Graphical Skills:
1. Combine the market demand curve and market price to find out the area of CS
and calculate the magnitude of CS.

Problem Solving Skills:

1. Derive a firm’s short run and long run supply curves with the price condition: min
AVC or min LAC.
2. Derive the short run and long run industry supply curves.
3. Given demand, solve for short run and long run equilibrium price and quantity.
Pay attention to the quantity produced by the whole market and the quantity
produced by an individual firm. Learn to determine the number of firms in a
market.
4. In the long run equilibrium, determine a firm’s Qmin where LAC is minimized.
5. Calculate CS, π and SS for a perfectly competitive market.