Lecture Principles of Microeconomics - Chapter 9: Perfect competition. After reading this chapter, you should be able to: Explain the assumptions of perfect competition, calculate a firm's profit graphically, distinguish between economic and accounting profit, understand a firm's incentive to innovate in perfect competition. | Chapter 9 Perfect Competition McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is perfect competition? How is the demand curve for a competitive firm? How does a competitive firm decide quantity of output to produce? How does a competitive firm make profit or loss? When does a competitive firm shut down? What is the difference between accounting and economic profit? How does a competitive firm behave in the long run? What are the social benefits of perfect competition? 9- Assumptions of Perfect Competition There are many buyers and sellers. Limiting competition is unlikely in a crowded market. Firms can enter and exit the market freely in the long run. Free entry inhibits collusion among the firms. Everyone has perfect information about the product sold. Buyers and sellers lacking information may compete less vigorously. 9- Assumptions of Perfect Competition All firms make exactly the same product. The | Chapter 9 Perfect Competition McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is perfect competition? How is the demand curve for a competitive firm? How does a competitive firm decide quantity of output to produce? How does a competitive firm make profit or loss? When does a competitive firm shut down? What is the difference between accounting and economic profit? How does a competitive firm behave in the long run? What are the social benefits of perfect competition? 9- Assumptions of Perfect Competition There are many buyers and sellers. Limiting competition is unlikely in a crowded market. Firms can enter and exit the market freely in the long run. Free entry inhibits collusion among the firms. Everyone has perfect information about the product sold. Buyers and sellers lacking information may compete less vigorously. 9- Assumptions of Perfect Competition All firms make exactly the same product. The better substitutes two products are, the more they compete. All firms face exactly the same costs. Average total costs do not continually decrease. If average total costs are continually decreasing, then one single firm can dominate the market. 9- Assumptions of Perfect Competition All buyers and sellers are price takers: No buyer or seller can affect the price of the good. A price taker firm receives the same price for its good regardless of how much it produces. The demand curve facing a firm is perfectly horizontal. 9- Perfect Competition as an Approximation Assumptions of perfect competition are never perfectly satisfied in the real world. The assumptions allow one to better understand the complex real world. These assumptions are a reasonable approximation of many real-life economic situations. 9- Firm’s Behavior in Perfect Competitive Price > marginal cost: Profits will increase by producing more. Price < marginal cost: Profits will increase by producing .
