3-12-08 - The unique thing about perfect competition is...

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The unique thing about perfect competition is that each firm is small enough that if they were to drop out of the market the supply curve would not change in any appreciable way. This is why firms are price takers. The price that the firms in a perfectly competitive industry take is determined by the intersection of the industry supply and demand curves Three Possible Short-Run Outcomes (1) Normal Profits (Zero Economic Profits) – Called normal profits because they cover your opportunity cost. (2) Economic Profit (3) Economic Loss
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Normal Profits Economic Profit
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Economic Loss Perfect Competition in the Long-run Recall the equilibrium is a situation in which economics agents do not have incentives to change their behavior. In a perfectly competitive industry the long-run equilibrium occurs when economi profits are zero. Why? (1) Profits → Firms Enter Industry, Firms Increase plant size (capital stock) → Supply Shifts Out → Price Falls → Profits Decrease.
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