Michael Melvin and William Boyes

Principles of Microeconomics
9e

Perfect Competition

Chapter 9

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Perfect Competition
Perfect competition is a firm behavior that occurs when many
firms produce identical products and entry is easy.

Characteristics of perfect competition:

 There are many sellers.

 The products sold by all the firms in the industry are identical.
 Entry into and exit from the market are easy, and there are
many potential entrants.
 Buyers (consumers) and sellers (firms) have perfect
information.

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Price Taker
 A firm in a perfectly competitive market is said to be a
price taker because the price of the product is
determined by market supply and demand, and the
individual firm can do nothing to change that price.
 The result is that the individual firm perceives the
demand curve for its product as being perfectly
horizontal.

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Market Supply and Demand and Single-Firm
Demand

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Profit Maximization
 Profit is maximized where MR=MC.
 If the cost of producing one more unit is less than the revenue
it generates, then a profit is available for the firm that increases
production by one unit.
 If the cost of producing one more unit is more than the
revenue it generates, then increasing production reduces profit.
 Thus the firm will stop increasing production at the point at
which it stops being profitable to do so—where MR=MC.
 Graphically this occurs where the MC curve crosses the MR
curve.

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Profit Maximization: The Numbers

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
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Profit Maximization: Graphical Analysis

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Determining Profit or Loss
 MR=MC is the profit-maximizing or loss-minimizing output
level.

 The perfectly elastic demand curve (the price line and the
marginal-revenue curve) is affected by price changes.

 Profitor loss is determined by finding the quantity at which

the marginal-revenue curve equals the marginal-cost curve.

 If the demand curve is above the ATC curve, the firm is making
a profit. If the ATC curve exceeds the price line, the firm is
suffering a loss.

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service or otherwise on a password-protected website for classroom.
Loss Minimization: The Numbers

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom.
Loss Minimization: Graphical Analysis

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Minimizing Loss
 Shutdown price: the minimum point of the average-
variable-cost (AVC) curve.

 Break-even price: A price that is equal to the minimum

point of the average-total-cost (ATC) curve.
 At this price, economic profit is zero.

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Shutdown Price

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The Long Run
 The short run is a timeframe in which at least one of the
resources used in production cannot be changed.

 Exit and entry are long-run phenomena.

 In the long run, all quantities of resources can be changed.

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Normal Profit in the Long Run
 Entry and exit occur whenever firms are earning more or
less than “normal profit” (zero economic profit).
 If firms are earning more than normal profit, other firms will
have an incentive to enter the market.
 If firms are earning less than normal profit, firms in the industry
will have an incentive to exit the market.

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Economic Profit in the Long Run

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The Predictions of the Model of Perfect Competition
A zero economic profit is a normal accounting profit, or
just normal profit.

 Firms produce where marginal cost equals price.

 No one could be made better off without making

someone else worse off. Economists refer to this result as
economic efficiency.

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Consumer and Producer Surplus
 Consumer surplus: the difference between what the
consumers would have been willing and able to pay for a
product and the price they actually have to pay to buy the
product.
 Producer surplus: the difference between the price firms
would have been willing and able to accept for their
products and the price they actually receive for them.

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service or otherwise on a password-protected website for classroom.
Producer and Consumer Surplus

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Rent Control and Market Efficiency

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