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Flashcards in Perfect Competition Deck (6)
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The Theory of Perfect Competition

1) All firms in the market sell a homogeneous product. (A product from firm A is a perfect substitute for a product from firm B)

2) Consumers and producers know the nature of the product being sold and the prices charged by each firm (Consumers and producers cannot be fooled)

3) There are many buyers and sellers in the makers for this product

4) The industry is characterized by freedom of exit

5) Individual firms are price takers. That is an individual firm has no power to influence the market through which its product is being sold.


Profit Maximization in the Short Run

We know that profit maximization occurs at the Quantity where MR = MC

Thus, in a perfectly competitive market, an individual producer maximizes profits at the QUANTITY where P=MR=MC or where P=MC


How to Calculate Market Supply

Just horizontally sum individual supply curves


Long Run Equilibrium in a Perfectly Competitive Market

In the long run, firms can exit the market or firms can enter the market

Entry will continue until profits EQUAL 0

Profits = 0 where MC intersects with ATC


Short Run Exit and Entry

In the long run, Profit 0 will induce entry


Constant Cost Industry

Per unit costs do not change as firms enter the market