Review Notes - Market Structure: Perfect Competition

- Characteristics of P.C. market

- many buyers and sellers

- all small relative to the market

- homogeneous product

- no entry/exit barriers

- What is firm D in a P.C. market? Market Demand?

- profit maximization by P.C. firms (the same principles apply to all firms).

- definition of MR = change in TR ÷ change in q. What does this mean?

- if MR > MC => continue to produce (increase q).

- if MR < MC => do not produce this unit (decreases q).

- if MR = MC => profit is maxmized. why?

- profit maxmization graphically (see the following figure). You must answer the following questions (again, the same principles apply to all firms).

- What is the profit maximizing quantity level?

- what is the highest price the firm can charge for this quantity?

- Be prepared to find on the graph: profit maximizing q and p, profit, TR, TC, TVC, TFC, AFC, AVC, ATC.

- Should this firm produce in the short-run? Where is the short-run shutdown point?

- Should this firm produce in the long-run? Where is the long-run shutdown point?

- What is the Firm's short-run supply curve? What is the industry's short-run supply curve?

- the long-run in P.C. markets.

- the crucial characteristic = free entry and exit.

- profit serves as a signal for entry/exit. If profit > 0 => entry in the long-run. If profit < 0 => exit in the long-run. If profit = 0 => no entry and no exit => long-run equilibrium.

- When in long-run equilibrium => (1) P=MR=MC=AC, (2) q is such that AC is at its minimum point, etc. Make sure you know all of the results when in long-run equilibrium.

- What is the long-run industry supply?

- Increasing Cost Industry?

- Decreasing Cost Industry?

- Constant Cost Industry?

- Are Perfectly Competitive Markets Efficient?

- Technological Efficiency?

- Firm Technological Efficiency? Does the firm produce a given quantity at minimum cost? (Are they on their cost curves?).

- Industry Technological Efficiency? Does the industry produce a given quantity at minimum cost? (Is each firm producing at the minimum point of their AC curve?)

- Allocative Efficiency. Is P = MC (MSB = MSC)? (HINT: make sure you keep profit max. and allocative efficiency straight, they aren't the same thing.)