Lesson Plan

Market Structure: Perfect Competition



I. What is a perfectly competitive market?

- definition
- large number of potential buyers and sellers
- homogenous product (every firm produces the same product)
- buyers and sellers are small relative to the market
- no barriers to entry or exit
- demand in a perfectly competitive market
- market demand
- firm demand
- what is a price taker?

II. Short-run pricing and output

- how do firms maximize profit
- total revenue and total cost approach
- equations
- graphically
- marginal revenue and marginal cost approach
- what is marginal and average revenue?
- for a perfectly competitive firm?
- maximize profit where MR=MC. Why?
- graphical
- what is total profit?
- what is total revenue?
- what is total cost?
- loss minimization and the short-run shut down point
- suppose profit < 0? when will the firm shutdown?
- how do fixed costs impact the decision?
- short-run shut down point
- must cover variable costs or else shut down
- thus, Q must be set so that P > or = AVC or else shut down
- what is the firm's short-run supply curve?
- what is the industry's short-run supply curve?

III. The long-run in competitive markets

- entry into the market is possible in the long-run => profit serves as the signal
- if profit > 0 => firms enter
- if profit < 0 => firms exit
- graphical examples
- long-run equilibrium (profit = 0 => no entry or exit)
- long run industry supply
- constant cost industry
- increasing cost industry
- decreasing cost industry