AP Microeconomics–Perfect Competition

•Many firms in the market
•Firms should be able to enter and exit the market easily
•Homogeneous product (standardized product, Commodity)
•All firms and consumers in the market have complete information about prices, product quality, and production techniques.

A firm that is operating in a perfectly competitive market

a price taker cannot control the price of the good it sells; it simply takes the market price as given, IMPOSSIBLE for a single firm to affect the market price by changing quantity supplied

•Demand for a firm is perfectly elastic—shows price taker characteristics
•Demand curve for market is downward sloping

•Firm's objective is to maximize profits subject to two constraints: the consumers' demand for the firm's product and the firm's costs of production
•Consumer demand determines the price at which a perfectly competitive firm may sell its output

the dollar amount that the firm earns from sales of its output (P x Q)

the dollar amount by which a firms total revenue changes in response to a 1-unit change in the firms output (the firm's marginal revenue is equal to the market price, MR=AR=P=d)

A firm maximizes its profits by choosing to supply the level of output where MR=MC

MR is below minimum ATC and above minimum AVC curve, firm will have to consider whether to shut down its operation in the future

When MR is below minimum AVC. In detail: the firm must pay its fixed costs, regardless of whether it produces any output. Hence the firm's fixed costs are considered sunk costs and will not have any bearing on whether the firm decides to shut down. Thus, the firm will focus on its AVC in determining whether to shut down.

The portion of a firms MC curve that lies above its minimum AVC

The horizontal summation of all the individual firms' short-run supply curves

Firms can vary all of their input factors allows for the possibility that new firms will enter the market and some existing firms will exit the market. In a perfectly competitive market, there are no barriers to the entry and exit of firms. New firms will enter market if there are positive economic profits, and existing firms will leave if they are earning losses (shut-down decision)

Normal profits; long run equilibrium in perfectly competitive market due to entry and exit of firms

In the long run, a firm can adjust the amount it uses of all factor inputs, including those that are fixed in the short-run

Found by examining the responsiveness of short-run market supply to a change in market demand. The long-run market supply curve in an increasing-cost industry will be positively sloped