Lecture Notes: Perfect Competition in Microeconomics

Introduction

• Focus on the four market structures, especially Perfect Competition in this unit.
• Understanding cost curves, revenue, and maximizing profit are essential.
• Perfect competition is the most critical and complex of the market structures.

Characteristics of Perfect Competition

• Many small firms in the market.
• Low barriers to entry; firms can enter/exit freely.
• Products are perfect substitutes; examples include commodities like corn, rice, milk.
• Firms are price takers; market dictates the price.

Graphical Analysis

• Side-by-side graphs show market and individual firm dynamics.
• Mr. DARP: Marginal Revenue = Demand = Average Revenue = Price.
  • This concept helps to understand demand for the firm being perfectly elastic.

Profit and Cost Calculations

• MR = MC: Point where firms produce optimal output.
• Total Revenue (TR) = Price x Quantity.
• Total Cost (TC) = Average Total Cost (ATC) x Quantity.
• Profit = TR - TC.
• Firms may experience profit or loss only in the short run.

Long Run Equilibrium

• No economic profit in the long run:
  • If firms make a profit, new firms enter, supply increases, price drops.
  • If firms incur a loss, firms exit, supply decreases, price increases.
• Efficiency:
  • Allocative Efficiency: Price = Marginal Cost.
  • Productive Efficiency: Firms produce at lowest ATC in the long run.

Types of Industry Cost Structures

• Constant Cost Industry:
  • Entry of new firms doesn’t increase the input prices.
  • Long-run supply curve shifts without changing equilibrium price.
• Increasing Cost Industry:
  • Entry of firms increases input prices.
  • New long-run equilibrium at a higher price.

Skills and Practice

• Master drawing and shifting side-by-side graphs for profit, loss, and equilibrium scenarios.
• Importance of understanding changes from short-run to long-run and vice versa.
• Practice resources available in the ultimate review packet.

Summary

• Perfect competition illustrates critical economic concepts and efficiencies.
• Understanding this structure aids in grasping other market structures.

Additional Resources and Pop Quiz

• Ultimate Review Packet with practice exams and videos.
• Pop quiz provided for self-assessment.

Conclusion

• Importance of subscription for more educational content.
• Encouragement to leverage the practice materials for better understanding.

Note: Ensure familiarity with drawing different market scenarios and predicting market responses in varied industry cost contexts.