Lecture Notes: Perfect Competition in Microeconomics

Overview

• Presenter: Jacob Clifford
• Context: Microeconomics, Unit 3
• Focus: Perfect Competition within Market Structures

Market Structures

• Total of four market structures, with perfect competition as the focus of Unit 3.
• Remaining three market structures to be covered in Unit 4.

Characteristics of Perfect Competition

• Market Assumptions:

  • Many small firms in the market.
  • High level of competition.
  • Low barriers to entry.
  • Firms produce identical products (commodities like corn, rice, milk).
  • Firms are price takers – they take the market price.

• Market Dynamics:

  • In the event of profit, new firms enter, shifting supply curve right.
  • Entry of new firms lowers market price.

Key Concepts

• Demand Curve: Perfectly elastic for each firm; referred to by the acronym MR. DARP (Marginal Revenue = Demand = Average Revenue = Price).

• Profit Calculation:

  • Produce where MR = MC (Marginal Cost) to determine quantity.
  • Total Revenue = Price x Quantity.
  • Total Cost = Average Total Cost (ATC) x Quantity.
  • Profit = Total Revenue - Total Cost.

• Short Run vs Long Run:

  • Short Run: Firms can make a profit or loss.
  • Long Run:
    • If making profit, other firms enter, and supply increases, leading to zero economic profit (long run equilibrium).
    • If making a loss, firms exit, leading to reduced supply and eventual equilibrium.

Efficiency in Perfect Competition

• Allocative Efficiency: Price equals marginal cost (no deadweight loss).
• Productive Efficiency:
  • Achieved in the long run.
  • Firms produce at the lowest point on the ATC curve.

Graphical Analysis

• Common Graphing Tasks:
  • Drawing side-by-side graphs for:
    • Firm making a profit.
    • Firm making a loss.
    • Firm in long-run equilibrium.
  • Understanding shifts in graphs in response to changes in market conditions.

Additional Concepts

• Constant Cost Industry:
  • Price of inputs remains constant despite market entry.
• Increasing Cost Industry:
  • Entry of firms leads to increased input costs, shifting the equilibrium price.

Study Resources

• Ultimate Review Packet: Offers practice sheets, exams, and exclusive practice videos.

Pop Quiz

• Encouraged to attempt the quiz provided to test understanding.

Conclusion

• Importance of Perfect Competition:

  • Fundamental for understanding other market structures.
  • Emphasis on achieving comfort with drawing and analyzing graphs related to perfect competition.

• Engagement:

  • Viewers encouraged to subscribe and utilize the review packet for better understanding.