EC4101 Perfect Competition Lecture Notes PDF

EC4101 Wk.10 Lec.01 Perfect Competition: A market in which both buyers and sellers believe that their own actions have no effect on the market price. Key Characteristics: There are many buyers and sellers, each with a small market share: the fraction of the total industry output acc...

EC4101 Wk.10 Lec.01 Perfect Competition: A market in which both buyers and sellers believe that their own actions have no effect on the market price. Key Characteristics: There are many buyers and sellers, each with a small market share: the fraction of the total industry output accounted for by that consumer’s output. Therefore, both suppliers and consumers are price takers: they’ll take the market price and have no ability to influence it. The product is standardised across sellers. If identical, they are homogenous. They sell for the same price. There is free entry and exit. There is perfect information among both buyers and sellers. In a perfectly competitive market, each firm faces a horizontal demand curve. Regardless of how much they sell, they will receive the same price. Since each firm is a price taker, TR = Q x P, Profit = TR – TC Unlike Accounting Profit, Economic Profit includes implicit costs (opportunity costs). A firm is only economically profitable when total revenue exceeds the sum of implicit and explicit costs. Economic profit is therefore smaller than accounting profit. In a perfectly competitive market, MR = P = MC. Optimal Level of Output: MR = MC (of the last unit produced) The firm in the graph above is breaking even. It would be profitable if ATC was lower than where MC=MR, and it would make a loss if ATC was any higher. Shutdown Price = Minimum AVC. In the short run, a firm will produce if P > minimum AVC References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: www.coursesidekick.com Image 2: Economics (12th Ed.) David Begg.