People are price takers
Producers – can’t raise the price
Consumers – can’t lower the price
Referring to any one individual by producer and consumer
Each producer has a small market share
Lots of buyers and sellers
Milk, wheat, corn, oil
Free entry and exit
No barriers to entry
Where is profit on an individual producer’s graph?
How many units will be produced by producer 1?
P represents the marginal revenue, amount of money you get for each individual
Where P = MC. If you produce more your costs are greater than your benefits
Produce at the quantity where marginal revenue = marginal cost
How do we calculate profit?
Profit = total revenue – total cost
The area under the P curve up till the Q produced is TR
Revenue is just gross income
ATC x Q = TC The area under the ATC curve (horizontal line from Q on ATC to the axis) up to Q
produced is TC
If the market is perfectly competitive, in the long run there will be no economic profit.
If there were economic profits, everyone would