1. Perfect Competition
● What we have looked at: Downward sloping demand, typical graphs
● Now we focus on: Supply curve
○ Supply curve exists only in a perfectly competitive market
○ The supply curve is driven by profit-maximizing behaviour by a firm in a
perfectly competitive industry
Your an organic farmer (no pesticides)
● There is a sharp increase in the demand for organic foods.
■ 1) Will you earn (economic) profits?
■ 2) Will these (economic) profits continue over the long run?
■ 1) Yes.
● intuitively, you produce a product and the demand goes up
■ 2) No
● Will not continue in the long run
● As an organic farmer earning economic profits, serves as an
incentives for other farmers to switch to organic crops
● As others farmers switch to organic crops, competition is
going to continue until the economic profits are competed
● Insight: for economic profit to persist over the long run, there must be obstacles
(barriers to entry) that prevent new firms from entering and competing.
● Organic Foods: A perfectly competitive market.
● What is a perfectly competitive market? Requirements: ○ 1) MANY buyers and sellers of an IDENTICAL product (so that actions of
each buyer and seller do no influence market price)
○ 2) Firms can enter or exit the industry (No barriers to entry or exit)
■ Farmers who wishes to switch to organic crops and do so
● Key features
○ 1) Each firm is a price taker and faces a perfectly elastic demand curve
at market price
■ No firm is large enough to have any impact on market price
○ 2) The number of firms is fixed in the short run, but can vary in the long
○ Study role of individual terms in a perfectly competitive industry
○ DD: market demand curve
○ dd: firm’s demand curve
○ supply of the output of the industry reflects on the behaviour of the
individual firms in the industry
○ Demand curve facing the market as a whole is downward sloping, and the
demand curve facing an individual firm is perfectly elastic at the market
○ Individual terms: action of the each seller (sell as much output as it wants)
do not have any influence on the market price.
2. Total Revenue,Average Revenue, Marginal
● If your a firm in a perfectly competitive market, how do you choose that level of output that will maximize your profit?
● Firm in a perfectly competitive market: a firm who can vary its output and not
influence the market price.
Q P TR (P*Q) AR (TR/Q) MR
( TR/ Q)
1 6 6 6 6
2 6 12 6 6
3 6 18 6 6
4 6 24 6 6
5 6 30 6 6
● Market price, determined by the market. Firm