Lecture Notes: Perfect Competition

Introduction

• Presenter: Jacob Clifford
• Topic: Perfect Competition in Microeconomics
• Context: Part of Unit 3, covering the four market structures.
  • Perfect competition is introduced in this unit.
  • The other three market structures will be covered in Unit 4.

Key Characteristics of Perfect Competition

• Market Characteristics:
  • Many Small Firms: Numerous small firms competing.
  • Low Barriers to Entry: Easy entry for new firms if profits are present.
  • Identical Products: Firms produce commodities like corn, rice, or milk.
  • Price Takers: Firms must accept the price determined by the market.
• Graphical Representation:
  • Teachers often require drawing side-by-side graphs of the market and an individual firm.

Economic Concepts

• Price and Demand:
  • Demand for each firm is perfectly elastic.
  • MR. DARP: Marginal Revenue = Demand = Average Revenue = Price.
• Cost Curves and Profit Calculation:
  • Use cost curves to calculate total revenue, total cost, and profit.
  • Produce where MR = MC (Marginal Cost) to determine quantity.
  • Profit is the difference between total revenue and total cost.
  • Firms can make a profit or loss only in the short run.

Long Run Equilibrium

• Long Run Dynamics:
  • Entry of new firms in the market increases supply, decreasing price.
  • In the long run, economic profit is zero (normal profit).
  • If firms incur losses, some will exit, reducing supply and increasing price.
• Efficiency:
  • Allocative Efficiency: Price equals marginal cost; society's valuation matches production cost.
  • Productive Efficiency: Firms produce at the lowest point of the ATC curve in the long run.

Graphical Skills

• Side-by-Side Graphs:
  • Draw graphs for firms in different states: profit, loss, and long-run equilibrium.
  • Understand shifts in supply and demand due to market dynamics.
• Constant Cost vs. Increasing Cost Industries:
  • Constant Cost Industry: Entry of new firms does not increase input costs.
  • Increasing Cost Industry: Entry raises input costs, leading to higher prices.

Study Resources

• Practice Videos:
  • Exclusive practice videos available in the Ultimate Review Packet.
• Graph Practice: Required to practice drawing and shifting graphs.

Conclusion

• Importance of Perfect Competition:
  • Fundamental for understanding other market structures.
  • Focus on mastering the horizontal demand curve.
• Resources:
  • Subscribe and use the Ultimate Review Packet for additional practice.
• Pop Quiz:
  • Encourage engagement with quiz questions to test understanding.

Note: These notes are summarized from a lecture on perfect competition and its characteristics in microeconomic theory.