Chapter 14

Perfectly Competitive Markets

• In a perfectly competitive market, firms are price takers, meaning they have no power to set their own prices and must accept the market price.
• The short-run supply curve for a firm in a perfectly competitive market is the portion of its marginal cost curve that lies above the average variable cost curve.
• A firm will shut down in the short run if the price is below its average variable cost, as it cannot cover its variable costs.
• In the long run, firms in a perfectly competitive market will earn zero economic profit as new entrants will drive prices down to the point where only the most efficient firms can survive. This is due to the free entry and exit of firms in the market.
• Total revenue (TR) in a perfectly competitive market is calculated as Price (P) x Quantity (Q).
• A firm will exit the market in the long run if the price is below its average total cost, meaning it cannot cover all of its costs.
• Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant to future decisions.
• Market supply increases when new firms enter due to positive profit. Increased supply leads to price decreases, driving profits back towards zero.
• Profit is maximized for a firm in a perfectly competitive market when marginal revenue (MR) equals marginal cost (MC). Since MR is equal to price, profit is maximized when P = MC.

Test your understanding of perfect competition in economics. This quiz covers the characteristics and implications of firms operating in a perfectly competitive market. Challenge your knowledge on price setting and market dynamics.