Perfect Competition

By Kayleigh Verney

The 5 characteristics to Perfect Competition

• All firms are price takers • All firms sell a homogeneous product• A large number of buyers and sellers • NO barriers to entry• Perfect information

Farms!

Supply and Demand in

PC

Profit Maximization

Where do you want to be?

• MR=MC: PROFIT MAXIMIZATION !

• MR>MC: revenue is increasing faster than cost, so production should

increase.

• MR<MC: revenue is below marginal cost, so production should slow down.

Elasticity in Perfect Competition• In a perfect competition firm the

demand is perfectly elastic because they are “price takers”. The definition of a price taker is a industry or firm who has no affect of influence on the price of an item.

• EX: In New Paltz it seems like there are hundreds of pizzerias and because of that a slice of pizza from all of them have to cost relatively the same . So La Bella’s cant have a slice of pizza costing $2 while Rinos is only charging $1.25 , because everyone would just go to Rino’s meaning New Paltz Pizzerias could be part of the Perfectly Competitive market.

Eco-A

rt

A perfectly competitive firm should always:

A. Earn an economic profit.B.Increase its price if it is experiencing an economic loss.C. Produce the quantity where its marginal cost equals its marginal revenue.D. Produce at the productively efficient level of output.

The Answer is…

cIn order to reach profit

maximization MR must = MC

A firm in a perfectly competitive firm has

A. a perfectly elastic supply curve.B. a perfectly elastic demand curve.C. a negatively sloped demand curve.D. a positively sloped demand curve.

The Answer is….

BIn a Perfectly Competitive firm the

demand Curve is PERFECTLY elastic because in the firm you are a price taker.

Which of the following is not a valid option for a perfectly

competitive firm?

A. Increasing its output.B. Decreasing its output.C. Increasing its price.D. Increasing its resources.

The Answer is…

cOnly “Price Makers” can in crease their

prices like Monopolies or Oligopolies.

2010 AP MICROECONOMICS FREE-RESPONSE QUESTIONS • 1. Assume that corn is produced in a perfectly competitive market. Farmer Roy is a typical producer

of corn. • (a) Assume that Farmer Roy is making zero economic profit in the short run. Draw a correctly

labeled side-by- side graph for the corn market and for Farmer Roy and show each of the following. • (i) The equilibrium price and quantity for the corn market, labeled as P M1 and QM1, respectively • (ii) The equilibrium quantity for Farmer Roy, labeled as Q F1 • (b) For Farmer Roy’s corn, is the demand perfectly elastic, perfectly inelastic, relatively elastic,

relatively inelastic, or unit elastic? Explain. • (c) Corn can be used as an input in the production of ethanol. The demand for ethanol has

significantly increased. • (i) Show on your graph in part (a) the effect of the increase in demand for ethanol on the market

price and quantity of corn in the short run, labeling the new equilibrium price and quantity as P M2 and QM2, respectively.

• (ii) Show on your graph in part (a) the effect of the increase in demand for ethanol on Farmer Roy quantity of corn in the short run, labeling the quantity as Q F2.

• (iii) How does the average total cost for Farmer Roy at Q F2 compare with PM2? • (d) Corn is also used as an input in the production of cereal. What is the effect of the increased

demand for ethanol on the equilibrium price and quantity in the cereal market in the short run? Explain.

ANSWER ON BOARD

Real World Links

• http://www.perfectcompetition.net/

• http://faculty.lebow.drexel.edu/McCainR//top/prin/txt/Comp/PC2.html