PERFECT COMPETITON

Perfect competition a market structure characterized by a large number of firms so small relative to the overall size of the market, such that no single firm can affect the market price or quantity exchanged. Perfectly competitive firms are price takers. They set a production level based on the price determined in the market. If the market price changes, then the firm re-evaluates its production decision.

perfectly competitive market is a price taker and can sell all of the output that it wants at the going market price Because it can sell all of the output it wants at the going market price, it has no reason to charge less. perfectly competitive firm is unrelated to the quantity of output produced and sold, this price is also equal to the marginal revenue and average revenue generated by the firm. For ex-If a firm is able to sell any quantity of output for $2.50 each, then the average revenue, revenue per unit sold, is also $2.50. Moreover, each additional unit of output sold, marginal revenue, generates an extra $2.50.

A perfectly competitive firm faces a horizontal or perfectly elastic demand curve, such as the one displayed

Demand Curve, Perfect Competition

PERFECT COMPETITION, CHARACTERISTICS:

PERFECT COMPETITION, CHARACTERISTICS: A large number of small firms Identical products sold by all firms Perfect resource mobility or the freedom of entry into and exit out of the industry, and Perfect knowledge of prices and technology

PERFECT COMPETITION UNDER PERFECT COMPETITION

perfectly

competitive firm, like any other firm, is motivate by profit maximization. The top panel indicates the two sides of the profit decision--revenue and cost. The straight green line is total revenue. Because price is constant, the total revenue curve is a straight line. The curved red line is total cost. The shape of the total cost curve is based on increasing then decreasing marginal returns. The difference between total revenue and total cost is profit, which is illustrated by the lower panel as the brown line.

Short-Run Production, Perfect Competition

SHORT RUN EQUILIBRIUM IN PERFECT COMPETITION

LONG RUN EQUALIBRIUM

In the long period, economic profit cannot be sustained In the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point

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