8: Perfect Competition
- Page ID
- 181240
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 8.0: Introduction
- This page introduces perfect competition, detailing firms' output decisions and long-term entry and exit management for efficiency. It uses the analogy of services like babysitting to illustrate how farmers face similar competition under identical products and price fluctuations.
- 8.1: Perfect Competition and Why It Matters
- This page explains perfectly competitive markets, highlighting features such as many firms selling identical products, price-taking behavior, and full information among participants. It covers the dynamic of free entry and exit, where profits lure new competitors while losses lead to firm exits. This competition leads to a long-run equilibrium where firms earn zero economic profit, stabilizing the market.
- 8.2: How Perfectly Competitive Firms Make Output Decisions
- This page outlines the principles of profit calculation, profit maximization, and production decision-making for perfectly competitive firms. It emphasizes the relationship between total revenue, total cost, marginal revenue, and marginal cost to determine optimal output levels. The content illustrates the dynamics of profit, breakeven, and loss scenarios, particularly focusing on a raspberry farm and its responses to varying costs and prices.
- 8.3: Entry and Exit Decisions in the Long Run
- This page explains how market entry and exit maintain zero profits in the long run in perfectly competitive industries, with firms facing short-run profit fluctuations. It categorizes industries by production cost responses to demand changes. Additionally, it describes three scenarios regarding supply and demand: equal supply and demand keeping prices stable, rising prices due to limited supply with high demand, and technological advancements leading to increased supply and lower prices.
- 8.4: Efficiency in Perfectly Competitive Markets
- This page discusses productive and allocative efficiency in perfect competition, where firms and consumers work towards maximizing efficiency. It defines productive efficiency as operating at minimum average cost and allocative efficiency as price equaling marginal cost. However, real-world markets face challenges like income inequality and monopolies that disrupt these efficiencies.
- 8.5: Key Terms
- This page covers essential economic concepts regarding market structures and firm behavior, including the break-even point, entry and exit dynamics, long-run equilibrium, and the role of marginal revenue. It emphasizes that firms achieve zero economic profit in perfect competition, where they act as price takers. The shutdown point is identified as the situation requiring firms to stop production if prices drop below average variable costs.
- 8.6: Key Concepts and Summary
- This page discusses perfect competition, characterized by many sellers and identical products, leading firms to be price takers. In the short run, firms maximize profits when marginal revenue equals marginal cost, earning profits or incurring losses depending on the market price relative to average cost.
- 8.7: Self-Check Questions
- This page discusses the characteristics of perfectly competitive markets, where firms are price takers. It examines independent trucking, the influence of price changes on profits, the role of marginal cost in supply, and how technological advancements affect production costs. The impact of labor unions on wages and market equilibrium is also analyzed. Additionally, it covers productive and allocative efficiency, underscoring their importance in comparing different market structures.
- 8.8: Review Questions
- This page covers key aspects of perfectly competitive markets, detailing characteristics of firms, the concept of "price takers," and how pricing decisions are made. It explains factors influencing output and profitability, shutdown indicators, and market dynamics including firm entry and exit. Additionally, it discusses long-run pricing and the efficiency of these markets regarding productive and allocative efficiency.
- 8.9: Critical Thinking Questions
- This page explores the intricacies of finding a life partner through the lens of market processes, drawing parallels to perfectly competitive markets. It addresses search costs, advertising strategies, and factors affecting profit maximization and bankruptcy. The discussion extends to the long-term dynamics of profit and loss, alongside considerations of efficiency and unaccounted social costs and benefits in pricing.
- 8.10: Problems
- This page analyzes two companies, AAA Aquarium Co. and Doggies Paradise Inc., focusing on their production costs and revenue in a competitive market. It includes calculations of total revenue, total cost, and marginal cost at different output levels to determine profit-maximizing outputs. The analysis is supported by tables and graphs.