Pure CompetitionPure Competition

Chapter 10Chapter 10

Chapter 23 Table 23.1Four types of Market Four types of Market

OrganizationOrganization

P = MRP = MRfor a for a

Perfectly Competitive FirmPerfectly Competitive Firm

Chapter 23 Table 23.2

In a Perfectly Competitive In a Perfectly Competitive Market, the firm is a Price Market, the firm is a Price

TakerTaker

Chapter 23 Figure 23.1

Chapter 23 Table 23.3

Chapter 23 Figure 23.2

Maximizing Profit in Pure Maximizing Profit in Pure CompetitionCompetition

Profit maximum occursProfit maximum occurs

When total revenue exceeds total When total revenue exceeds total costscosts

by the greatest amountby the greatest amount

This occurs where the slopes of total This occurs where the slopes of total cost and total revenuecost and total revenue

are equalare equal

Chapter 23 Table 23.4

Profit Maximum in Perfect Profit Maximum in Perfect CompetitionCompetition

Equivalent to finding equal slopes for Equivalent to finding equal slopes for TR & TCTR & TC

MR = MCMR = MC

For a firm in a perfectly competitive For a firm in a perfectly competitive marketmarket

MR = PMR = P

thereforetherefore

MR = P = MCMR = P = MC

Chapter 23 Figure 23.3

Short-run v. Long-run Short-run v. Long-run Economic ProfitEconomic Profit

Firms maximize short-run economic Firms maximize short-run economic profitprofit

In the long run, existence of short-run In the long run, existence of short-run profitsprofits

attract new market entrants, i.e., more attract new market entrants, i.e., more competitorscompetitors

driving down pricesdriving down prices

ensuring zero long-run economic profitensuring zero long-run economic profit

Chapter 23 Table 23.5

Loss-minimizing OutputLoss-minimizing Output

Chapter 23 Figure 23.4

Loss-minimizing OutputLoss-minimizing Output

Chapter 23 Figure 23.5

Shutdown ConditionShutdown Condition

Chapter 23 Table 23.6

Chapter 23 Figure 23.6Marginal Cost and Firm Marginal Cost and Firm

SupplySupply

Chapter 23 Table 23.7

Market EquilibriumMarket Equilibrium

Chapter 23 Figure 23.7(a)

Short-run Competitive Short-run Competitive EquilibriumEquilibriumfor the Firmfor the Firm

Chapter 23 Figure 23.7(b)

Short-run Competitive Short-run Competitive Equilibrium for the Industry Equilibrium for the Industry

and the Marketand the Market

Chapter 23 Table 23.8

The Perfectly Competitive The Perfectly Competitive Firm’sFirm’s

Output DecisionOutput Decision

Chapter 23 Figure 23.8(a)

TemporaTemporary Profits ry Profits Attract Attract New New FirmsFirms

Chapter 23 Figure 23.8(b)

ResultiResulting in ng in Lower Lower PricesPrices

Chapter 23 Figure 23.9(a)

Short-Short-run run Losses Losses Drive Drive Firms Firms OutOut

Chapter 23 Figure 23.9(b)DrivinDrivin

g g Prices Prices Back Back UpUp

Chapter 23 Figure 23.10

Long-run Supply is Perfectly Long-run Supply is Perfectly Elastic for a Constant-cost Elastic for a Constant-cost

IndustryIndustry

Chapter 23 Figure 23.11Long-run Supply forLong-run Supply for

an Increasing-cost Industryan Increasing-cost Industry

Chapter 23 Figure 23.12Long-run Equilibrium for a Long-run Equilibrium for a

Perfectly Competitive FirmPerfectly Competitive Firm

Efficiency and PureEfficiency and Pure CompetitionCompetition

Productive EfficiencyProductive EfficiencyP = Min ATCP = Min ATC

Allocative EfficiencyAllocative EfficiencyP = MCP = MC

Underallocation implied by P > MCUnderallocation implied by P > MC

Overallocation implied by P < MCOverallocation implied by P < MC

Consumer SurplusConsumer SurplusPerfect Competition Divides Surplus Perfect Competition Divides Surplus Value (Subjective)Value (Subjective)

more or less equally between more or less equally between Consumers and ProducersConsumers and Producers

Provides Maximum Consumer SurplusProvides Maximum Consumer Surplus

consistent with keeping the good in consistent with keeping the good in productionproduction