Overview
This lecture explains the concept of perfect competition in economics, detailing its key assumptions, the resulting market and firm behavior, and how pricing works in such markets.
Characteristics of Perfect Competition
- Perfect competition features many buyers and sellers in the market.
- All sellers offer identical products or services.
- Every market participant has perfect information about prices and transactions.
- There are no barriers to entry or exit for firms in the industry.
Market-Level Analysis
- The market is illustrated with an upward-sloping supply curve and a downward-sloping demand curve.
- Equilibrium price and quantity are determined where supply equals demand for the market as a whole.
Firm-Level Analysis
- Individual firms face a marginal cost curve that typically increases as quantity rises.
- The average total cost curve represents the average cost per unit for the firm.
- Firms in perfect competition are price takers, meaning they accept the market price.
- The marginal revenue for each unit sold equals the market price, shown as a horizontal line.
- The firm's demand curve is also its average revenue and marginal revenue curve, all at the market price.
- Firms maximize profit by producing where marginal cost equals marginal revenue.
Key Terms & Definitions
- Perfect Competition — a market structure with many buyers and sellers, identical products, perfect information, and no entry/exit barriers.
- Price Taker — a firm that accepts the market price and cannot influence it.
- Marginal Revenue — the additional revenue from selling one more unit, equal to the market price in perfect competition.
- Marginal Cost — the cost of producing one more unit.
- Equilibrium Price — the price at which the quantity supplied equals the quantity demanded.
Action Items / Next Steps
- Reflect on real-world markets and consider how closely they resemble perfect competition.
- Prepare for future discussions on other market structures and their differences from perfect competition.