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Rules for Perfect Competition
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1. Many buyers and sellers: All firms are "price takers" with no Market Power
2. No product differentiation: Each firms product is identical... perfect substitutes
3. No barriers to entry
2. No product differentiation: Each firms product is identical... perfect substitutes
3. No barriers to entry
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MR DARP (Perfect Comp only)
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Marginal Revenue = Demand = Average Revenue = Price
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If MR > MC, then the firm should
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Produce the good
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A firm should produce the good up to the Quantity where,
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MR=MC
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MR represents what in the graph
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Demand Curve
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MC represents what in the graph
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Supply Curve
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At Q* if P>ATC, the firm ______
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Profits
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At Q* if P<ATC, the firm _______
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Loses Money
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At Q*, if P=ATC, the firm _______
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Gets Zero Economic Profit and is at Long Run Equilibrium
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Long Run Equilibrium
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When no firms want to join or leave the market
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Profit=
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TR-TC or (P-ATC) x Q
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TR=
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P x Q
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MC=
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ΔTC/ΔQ
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AR=
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TR/Q
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ATC=
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TC/Q or AFC+AVC
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AVC=
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VC/Q
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Profit Maximization Equation
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MR=MC
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When MR < MC, the firm should
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Decrease output (Q)
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When MR > MC, the firm should
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Increase output (Q)
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When MR=MC AND the firm is yielding a profit, they should
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Change nothing
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When MR=MC BUT the firm is making no profit/negative profit, they should
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Exit or Shutdown
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