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Chapter 8

# Chapter 8 - Chapter 8 Perfect Competition Basic assumptions...

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Chapter 8: Perfect Competition Basic assumptions 1. Price taking 2. Product homogeneity 3. Free entry and exit Short – Run Analysis: Industry 1 firm Q q q

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Revenue Definitions: Rev = R(q) = P ∙ q = MR = dR/dq = AR = R/q = Profit Maximization: Firm chooses q* to max π (q) = R (q) – C (q) setting π′ (q) = 0 gives … Here, given that we have perfect competition, we can rewrite this rule to be to choose q* such that P = MC
How much π is there at q*? π (q*) = R (q*) – C (q*) = = We can see this as an area on the following diagram: q

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If P ≥ AC, then Econ Profit Recall section 7.1. This is “econ” profit. Uses the full opp. cost of all resources employed. If revenue covers this cost, then the resources are better employed here than in the identified ‘next best’ use. If P < AC, then Econ Loss But the firm doesn’t necessarily shutdown! The term “shutdown” means q = 0. But the firm in the short-run is still in business. It still has fixed factors of production.
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Chapter 8 - Chapter 8 Perfect Competition Basic assumptions...

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