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Three basic Assumption of Perfect Competition
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Price taking, product homogeneity and free entry/exit
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Price Taker
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Firm that has no influence over market price and thus takes the price as given
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Price Homogeneity
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Products of all firms in a market are perfect substitutable with one another
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Free Entry/Exit
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Condition under which there are no special costs that make it difficult for a firm to enter an industry
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Cooperative
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Association of businesses or people jointly owned and operated by members for mutual benefit
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Profit
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Difference between total revenue and total cost
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Marginal Revenue
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Change in revenue resulting from a one unit increase in output
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Demand Curve for an individual firm
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Is both its average revenue curve and its marginal revenue curve. Along this curve, MR, AR and price are all equal
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Output Rule
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If a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost
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Firms Supply curve
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The portion of the marginal cost curve for which marginal cost is greater than average variable cost
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Short-run Market supply curve
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Shows the amount of output that the industry will produce in the short run for every possible price
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Perfectly Inelastic Supply
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Arises when industry's plant and equipment are so fully utilized that greater output can be achieved only if new plants are built
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Perfectly elastic supply
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Arises when marginal cost is constant
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Producer Surplus
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Sum of all units produced by a firm of differences between the market price of a good and the marginal cost of production (difference between the firms revenue and total variable cost)
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Long-run Output of a Profit-Maximizing Competitive Firm
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The point at which long-run marginal cost equals the price
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Zero Economic profit
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A firm is earning a normal return on its investment
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When do firms enter and exit?
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Firms enter when it can earn a positive long-run profit and exit when it faces the prospect of a long-run loss.
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Long-run Competitive equilibrium
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All firms in an industry are maximizing profit, no firm has an incentive to enter or exit, price is such that QD equals QS
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Economic Rent
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Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it
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The producer surplus of a competitive market in the long run
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the economic rent generated by all scarce factors of production
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Long run Profit-Maximizing
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Price = long run marginal cost
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Short run profit-maximizing
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Price = short run marginal cost. Price >= firms minimum AVC of productions
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