Economics 2150A/B Lecture Notes - Lecture 9: Fixed Cost, Break Even, Perfect Competition

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Chapter 9 – Perfect Competitive Markets

Topics Overview:

9.1 – What is Perfect Competition?

9.2 – Profit Maximization by a Price-Taking Firm

9.3 – How the Market Price is Determined: Short-Run Equilibrium

9.4 – How the Market price is Determined: Long-Run Equilibrium

9.5 – Economic Rent and Producers Surplus

Additional – Profit Maximizations Implies Cost Minimization

Perfectly Competitive Markets

Definition – A perfectly competitive market consists of firms that produce identical products that sell

at the same price

Each firm’s volume of output is so small in comparison to the overall market demand that no single

firm has an impact on the market price

Perfectly Competitive Markets – Conditions:

1. Many buyers and sellers: None of the sellers and buyers is large in relation to total sales or

purchases

2. Homogenous product: Each firm produces and sells a homogenous product

3. Perfect Info: Everyone has perfect info about prices, product quality and supply etc.

4. Free entry and exit: Firms have free entry and exit in the market

oExamples: Rice farming, Dry cleaning, Market for rose

Characteristics of the perfectly competitive firm

1. A perfectly competitive firm is a price taker: Price is

determined by the market

2. The demand curve for a perfectly competitive firm is

horizontal: Each firm takes equilibrium price as given

3. Perfectly competitive firm sells all output at

equilibrium price: Selling above market price results in

no sales; While selling below market price is inefficient

and not profit maximizing

4. Price = Average Revenue = Marginal Rev.

Shown by the demand curve on

the demand graph for a single firm

“(b) Single firm”

The Profit Maximization Condition

Assuming the firm sells output Q, its economic profit is: π = TR (Q) – TC (Q)

oTR (Q) = Total Revenue from selling the quantity (Q)  TR (Q) = P x Q

oTC (Q) = Total economic cost of producing the quantity Q

Since P is taken as given, firm chooses Q to maximize profit. (below shows the effect of +1 extra unit)

Marginal Revenue (MR) – The rate which TR changes with output 

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ECON 2150A/B Full Course Notes

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9. 2 profit maximization by a price-taking firm. 9. 3 how the market price is determined: short-run equilibrium. 9. 4 how the market price is determined: long-run equilibrium. Additional profit maximizations implies cost minimization. Definition a perfectly competitive market consists of firms that produce identical products that sell at the same price. Each firm"s volume of output is so small in comparison to the overall market demand that no single firm has an impact on the market price. Shown by the demand curve on the demand graph for a single firm. Since p is taken as given, firm chooses q to maximize profit. (below shows the effect of +1 extra unit) Marginal revenue (mr) the rate which tr changes with output . If p > mc then profit rises if output is increased. If p < mc then profit falls if output is increased: therefore, the profit maximization condition for a price-taking firm is p = mc (profit max.

Related Questions

1. If the ATC curve is above the demand curve in a perfectly competitive firm, the firm will have a:

2. If the ATC curve is below the demand curve in a perfectly competitive firm, the firm will have a:

3. Even if in the short run, a perfectly competitive firm has a profit; in the long run, they always break even because:

- low barriers to entry

- profit incentives attract new firms

- perfectly homogenous products

- all of the above

4. A perfect competitor would:

- never charge above market price but might charge below market price

- never charge below market price but might charge above market price

- always change the market price

- none of the above

5. The crucial aspect of competition among firms that leads to the condition of zero profits in the long run is

- the number of firms in the industry is fixed

- free entry and exit of firms in the industry

- fixed costs equal zero

- all costs are at their least cost level.

mauvewombat755

1. Which of the following is a firm in a perfectly competitive market?

1) a local corn farmer

2) the Tennessee Valley Authority, a large electricity producer that serves areas of five states

3) pizza delivery

4) a grocery store

5) Kate Spade, fashion designer

2. Compare a perfectly competitive market with a monopolistically competitive market.

The markup the firm charges in a monopolistically competitive market is ___________ the markup charged by a firm in a perfectly competitive market.

The firm's excess capacity in a monopolistically competitive market is ___________ the firm's excess capacity in a firm in a perfectly competitive market.

The efficiency of a monopolistically competitive market is ___________ the efficiency of a perfectly competitive market.

1)greater than; less than; greater than

2)greater than; greater than; less than

3)less than; less than; greater than

4)greater than; less than; equal to

3. In the long run, how is price related to marginal cost in both perfect competition and in monopolistic competition?

1) The long-run price is driven to marginal cost in both competitive markets and markets that are monopolistically competitive.

2 )Both markets can charge more than the marginal cost in the long run because products are differentiated in both markets.

3) Products are identical in perfectly competitive markets, so a firm must charge less than the marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets where firms can charge more than marginal cost.

4) Because monopolistically competitive firms have market power, they set a price higher than marginal cost, while competitive firms cannot.

4. Titleist has an advertising slogan is "The #1 ball in golf" Consumers can also buy generic golf balls. The manufacturers of generic golf balls do not engage in any advertising. Assume that the average total cost of producing Titleist and generic golf balls is the same.

Which producer has a stronger incentive to maintain quality control in the production of golf balls?

1) Titleist

2) a manufacturer of generic golf balls

ultramarinebeaver27

1. When a profit-maximizing firm produces, they will be producing at that output at which marginal cost = marginal revenue:

all of the time
some of the time
on rare occasions
none of the time

2. Economics Profit is:

the same as accounting profit
sales minus explicit costs and implicit costs
sales minus variable costs and fixed costs
opportunity cost only

3. A market structure with so many firms that no one firm has any influence over price, and firms produce an identical product is called:

monopoly
oligopoly
perfect competition
monopolistic competition

4. Which of the following is NOT a characteristic of a perfectly competitive market?

identical products
perfect mobility
perfect knowledge
price maker

5. The demand curve in a perfectly competitive market is perfectly elastic.

true
false

emeraldwombat313

Economics 2150A/B Lecture Notes - Lecture 9: Fixed Cost, Break Even, Perfect Competition

ECON 2150A/B Full Course Notes

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