hey internet this is jacob clifford now here in microeconomics unit 3 you've learned the cost curves revenue maximizing profit we can finally learn the four market structures and the most difficult and the most important one perfect competition like i said there's four market structures and i promise you that your teacher or professor is gonna ask you about their characteristics here in unit three we're gonna learn about perfect competition the other three we're gonna learn in unit four a perfectly competitive market are the kind of markets we've been analyzing all the way back since unit two the supply and demand graphs that you've been drawing assume that this is a market that has many small firms and there's a lot of competition and that there's low barriers to entry so if there's profit being made other firms gonna jump in the market and the supply curve would shift to the right lowering the price and each firm in this market is producing the exact same product they're perfect substitutes for each other so these are commodities so it could be corn or rice or milk there's thousands of small dairy farmers each one of them is really small and they sell exactly the same product as all the other firms which means that they're price takers they have to take the price that's set by the market so your teacher is going to have you draw side-by-side graphs showing the market and an individual firm in the market and i finally get to introduce someone to you this right here is mr dark it's actually an old school toy called stretch armstrong but this is going to help you remember perfect competition [Music] especially since in unit 5 we're going to learn about his cousin senior merc each individual firm takes the price that's set by the market so the demand for the firm is perfectly elastic and that means that it's mr darp it's the marginal revenue the demand the average revenue and the price and when you add in the cost curves that you learned at the beginning of this unit you can start calculating total revenue total cost and profit remember you always produce where mr equals mc so that gives you the quantity the price times that quantity gives you the total revenue which is right there the average total cost at that quantity times the quantity gives you the total cost and the difference between total revenue and the total cost is the profit and if the atc was up here you'd be making a loss you'd produce where michael's mc price times quantity is the total revenue average total cost times the quantity is the total cost total cost bigger than the total revenue you're making a loss but like i mentioned in the last topic video you're only going to make profit or loss in the short run if you're a perfectly competitive firm and you're making a profit other firms going to see that profit and jump into the market that would increase the market supply curve decrease the price and you'll make no economic profit in the long run this is called long run equilibrium eventually every firm in the market is going to make no economic profit but remember that's not a bad thing their total revenue is covering all their explicit costs and their implicit costs and if firms are making a loss eventually some of those firms going to leave that would cause the market supply curve to shift to the left and we end up in the long run and there's a detail i'm going to mention here even though it's not going to fully make sense until you get to unit 4. unlike monopolies and the other market structures you're going to learn in unit 4 perfectly competitive firms are extremely efficient they have both allocative and productive efficiency they're allocatively efficient because the price equals the marginal cost in other words how much people want to pay for the product equals the cost of producing that last unit you'll see later on with monopolies that the price is greater than the marginal cost and basically society says we value this make more of them but they're not producing as many and they're causing deadweight loss but here perfect competition there's no deadweight loss and in the long run perfectly competitive firms are productively efficient because they're producing at the lowest possible cost the quantity that they're making is the lowest point of the atc curve and again this is only in the long run in the short run they're not productively efficient they're not producing at minimum atc now going back to the skills that you need to do well in your class i guarantee your teacher professor is going to have you draw side-by-side graphs and calculate total revenue total cost and profit and to help you i made an exclusive perfect competition practice video it's inside the ultimate review packet you definitely want to watch that video and practice and the ultimate review packet has practice sheets and practice exams to help you as well now let's go back to the graphs there's only three things that your teacher is going to ask you to do draw side-by-side grass with a market and a firm making a profit a firm making a loss or a firm in long-run equilibrium and they might ask you to draw what's going to happen in the long run if there's profit or in the long run if there's a loss or if we're already in the long run what happens to get us in the short run and how do we get back to the long run the point is you have to feel really comfortable drawing and shifting these side-by-side graphs so if your teacher asks you to draw side-by-side graphs with the firm making a profit you would draw this there's profit being made so in the long run firm's going to enter the supply curve is going to shift to the right price is going to go down and we'll be in long run equilibrium and if your teacher asked you to draw side by side grass with a firm making a loss it would look like this in the long run eventually firms would leave supply would shift to the left price would go up and we'd be back in the long run and if your teacher asked you to draw side-by-side graphs in the long run it would start like this and they say okay what would happen if the demand goes up for milk the demand curve would shift the right for the market the price would go up for the individual firm and they start making profit eventually in the long run other firms are going to want some of that profit so we're going to jump into the market causing the supply curve to shift to the right putting us back in the long run but this is assuming that this is a constant cost industry this means when other firms entered the market it didn't increase the price of milk machines and bottles and hay and other things you need to produce milk again this is called a constant cost industry and it's because the price didn't increase when other firms entered it stayed exactly the same because the cost didn't go up but let's do it again looking at an increase in cost industry we start here in long run there's no economic profit demand goes up for milk price goes up now we're making profit in the short run firms realize there's profit they want to jump in the market but that increases the cost to all the other firms increasing the price of milking machines and everything else so the average total cost and the marginal cost go up supply shifts to the right but we're now at a new price that was higher than the original long-run equilibrium price in other words from long run to long run the price didn't stay the same like a constant cost industry the price increased the vast majority of the time your teacher's gonna have you draw a constant cost industry but you should know about the other ones like i said at the beginning of this video of the four market structures perfect competition is the most important one because the first one you're gonna learn and if you get it really well you're gonna understand the other three and to help you remember i'm gonna add mr darp to the wall behind me this can help you remember there's a horizontal demand curve and it's a price that's set by the market [Music] and it's also gonna help you remember that whenever there's a perfect competitive market eventually in the long run it's going to return to longwood equilibrium but don't go anywhere there's still two things we have to do number one if you like this video if i'm helping you learn and love economics please subscribe and take a look at my ultimate review pack it has that practice video and practice resources gonna help you rock your class and number two it's time for a pop quiz the questions won't be on the screen for very long so pause the video see how you do and look at the first comment below for the answer key thanks for watching until next time