Perfect Competition

quantity
The firm can sell 40 units for $5. price
$5
40
quantity
The firm can sell 50 units for $5. price
$5
50 quantity
So all these points are on the demand curve for the firm’s product. price
For the p.c. firm, MR is equal to the market price. So MR is a horizontal line at the level of that price.
The demand curve for the p.c. firm is also a horizontal line at the level of the market price. So, for the p.c. firm, the demand curve and the MR curve are the same horizontal line.
The firm can sell 10 units for $5. price
$5
10
quantity
The firm can sell 20 units for $5. price
$5
20
quantity
The firm can sell 30 units for $5. price
$5
30
If the firm tried to charge a higher price, it would lose all its business. Customers could go elsewhere to buy the same product for less. Since the firm is very small, it can sell as much as it wants at the market price. So there’s no reason to charge a lower price.
comment
For ease of writing, instead of writing the “perfectly competitive” firm we will frequently write the “p.c.” firm.
The MR Curve for the p.c. Firm
• Many independent firms • Each seller is small relative to the whole market • Homogeneous (identical) product • Easy entry and exit (no barriers to entry)
The demand curve (D) and the MR curve for the perfectly competitive firm’s product. price
market price
D = MR
quantity
Optimal Output Level
Recall:
To maximize profit, the firm will produce at the output level where MR = MC. So the firm will produce where the MR and MC curves intersect.
Types of Market Structure
• Pure Competition or Perfect Competition • Monopoly
• Monopolistic Competition
• Oligopoly
Perfect Competition
Assumptions of Perfect Competition
Price Taking
The perfectly competitive firm is said to be a price-taker, because it takes the market price as given and has no control over the price. Why?...
market price
demand
quantity
Recall: Total Revenue
Total Revenue = Price x Quantity TR = P Q
Recall: Marginal Revenue (MR)
Marginal Revenue is the additional revenue earned from selling one additional unit of output. MR = DTR / DQ
The demand curve for the product of the perfectly competitive firm shows how much can be sold at specific prices. Let’s see what it would look little or as much as it wants at the market price. Suppose, for example, the market price is $5.
$5
quantity
Connecting these points, we have the demand curve for the firm’s product. price
$5
demand
quantity
The demand curve for the perfectly competitive firm’s product is a horizontal line at the market price. price