state is that it will not earn the interest on the cash it would have generated if the asset were
sold. Therefore this interest amount is to be included in the normal profit.
x Firm t An organization that combines factors of production to produce a good or service or
some combination of goods and services.
x Capital t Any durable inputs to the production process, such as tools, machinery, and buildings.
x Perfectly Competitive Markets
o Markets in which each individual firm has no influence over the market price of the
products it sells.
o Perfectly competitive firms are price takers.
o Four conditions are required for a perfectly competitive market:
All firms sell the same standardized product.
The market has many buyers and sellers, and each buys or sells only a small
fraction of the total quantity exchanged.
Productive resources are mobile.
Buyers and sellers are well informed. They know the market price and quality of
the standardized product.
x Why study perfect competition?
o Some markets (e.g., foreign exchange, many agricultural products) are closer to perfect
competition than to other market types.
o It is easier to first analyze perfect competition and then proceed to other market types
than it is to do the reverse.
o When individuals make mutually beneficial transactions in a perfectly competitive
market, their self-interested behaviour is harmonized with the common good.
Therefore, perfect competition provides a benchmark against which the outcomes of
other market types can be compared.
Individual Firm Entire Wheat Market
x Here D and SRS had the price of wheat at $2.10 bu/yr. This is where economic profit is zero and
ATC is at its minimum which is the lowest cost per unit of wheat that can be achieved for any
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