ECON 100 - Chapter 12 - Perfect Competition and the Supply Curve

1. They will not sell anything because the consumer can just go elsewhere

2. Price-takers (consumers are also price-takers)

3. Perfectly elastic for the individual firm, but not for the market

• 4. 
• 

• 1. PC = many firms
• M = only one

• 2. PC = other goods are perfect substitutes
• M = no close substitutes for the good because it is unique

• 3. PC = Firms are price takers (individual firm has to take equalibrium price as given)
• M = Firms are price-setters

• 4. PC = flat demand curve
• M = Downward sloping demand curve

• 5. PC = Free entry
• M = Barriers to entry

• 6. PC = (P = MR) *The price equals the marginal revenue because you have to accept the price as it is
• M = P ≠ MR

• 7. PC = Profit is maximized where MR = MC
• M = Profit is also maximized where MR = MC

• 8. PC = long run profit = 0, because in the long run more firms will enter the market until the profit margin decreases to 0. *There can still be an economic profit, but 0 accounting profit
• M = Profit is greater than 0

• 9. Where MR = MC 
• *Because this is the point where their profits are maximized

• 10. 
• 

• 1. TR = P x Q
• 2. MR = ΔTR ÷ ΔQ
• 3. MC = ΔTC ÷ ΔQ
• 4. MB = ΔTB ÷ ΔQ
• 5. MPL = ΔQ ÷ ΔL 
• 6. Profit = TR - TC, or 
• (P - SRATC) x Q
• 7. Marginal net gain (profit) = MR - MC
• 8. TC = FC + VC
• 9. ATC = TC ÷ Q, or
• AFC + AVC

1. Quantity changes (q1 to q2), but the price doesn't change.

2a. Standardized goods that are perfect substitutes

b. Many producers with no one having a large market share

• c. Industry has free exit and free entry
• * no obstacles such as gov. regulations or high start-up costs

3. No, because people are willing to pay more 'to be cool'

• 1. Where MC = MB, which is the same as MC = MR for producers, which is the same as MC = P in a competitive market. 
• So, the point where MC = MB/MR/P/D

• 2. Only where MR > MC
• The optimal output rule is that profit is maximized by producing the quantity where MR = MC or the last unit for which MR > MC
• 

3. NOT where ATC is lowest!!

• * In the following example, the profit maximizing quantity is 5 because at the next quantity MR would be less than MC
• 
• 

1. A firm's minimum SRATC, or ATC

• 2.
• 

• 3. 
• P > SRATC - Firm earns a profit
• P < SRATC - Firm incurs a loss
• P = SRATC - Firm breaks even

• 4.
• 

Find the Q where P (200) is greater to or equal to MC. Here it is at Q5 where MC is 170.

• Then calculate: Profit = (P - ATC)Q
• (200 - 138)5
• = 310

** Firms continue to produce with a loss in order to minimize their loss, otherwise their loss would be greater.

1. Find the Q where P (200) is greater to or equal to MC. Here it is at Q5 where MC is 170.

• Then calculate: Profit = (P - ATC)Q
• (200 - 138)5
• = 310

• ** Firms continue to produce with a loss in order to minimize their loss, otherwise their loss would be greater.
• 

• 1. The minimum point of the ATC curve
• Where ATC = P = MC

• 2. The minimum point of the AVC curve
• Where AVC = P = MC
• *Firms won't produce anything unless P ≥ min AVC

3. Fixed costs are sunk, but if a firm can no longer cover its variable costs, then it can't pay its workers (or purchase supplies) and can no longer produce.

*If P > minimum AVC, they will be able to pay the VC and some of the FC.

• 4. 
• 

• 1. 
• 

• 1. Start with FC.
• Since there won't be any VC at Q0, we know that TC must be the same as FC.

VC = TC - FC

AVC = VC ÷ Q

2. The lowest point at the AVC curve

• 3. 
• 
• The MC cuve from the lowest point on AVC curve upward. Below this, nothing is supplied

1. A firm can sell off fixed inputs and go out of business so they won't keep losing money

2. There will be profit to be made, so new firms can aquire fixed inputs and enter the market.

3. In the short run, the number of producers is fixed, but in the long run firms can enter or exit the market.

1.If they enter, S curve will shift right, if they exit, S curve will shift left

• 1a.
• 

• 2. The LRS curve follows the break even price, because when new firms enter the market, it will drive supply down to that level. It is horizontal. 
• 

3. The long run supply curve is always more elastic than the short run supply curve.

• 4. In the short run, there is a movement along ths S curve and the price drops below the break even price.
• In the long run, firms will exit the market and shift the supply curve to the left until it is back at the break even price.
• 

• Like this
• 

a. Start by figuring out the ATC, which is TC ÷ Q

• b. The breakeven price is the lowest point on the ATC curve, but it is also where MC = ATC
• So we can take the ATC function we just figured out, and set it equal to MC to find the break even price.

c. The market price is given at $20, and we know that in order to maximize profits, a firm will produce at the price where MR = MC. So P ($20) = MR = MC

• $20 = 2 + Q
• Q = $18

d. Here, it will be easier to use the first profit equation as TR - TC

We know that TR = P x Q, and TC is given as an equation. We have P and Q, so we can just fill in the blanks.

Profit = (PxQ) - (100 + 2Q + 0.5Q²)

(20  x 18) - [100 + 2(18) + 0.5(18)²]

*Make sure to do BEDMAS

360 - [100 + 36 + 0.5(324)]

360 - 298

Profit = $62