CHAPTER 10 Perfect Competition
What Is Perfect Competition?
The firms that you study in this chapter face the force
of raw competition. We call this extreme form of com-
petition perfect competition.
market in which
Many firms sell identical products to many buyers.
There are no restrictions on entry into the market.
Established firms have no advantage over new ones.
Sellers and buyers are well informed about prices.
Farming, fishing, wood pulping and paper milling,
the manufacture of paper cups and shopping bags,
grocery and fresh flower retailing, photo finishing,
lawn services, plumbing, painting, dry cleaning, and
laundry services are all examples of highly competi-
How Perfect Competition Arises
Perfect competition arises if the minimum efficient
scale of a single producer is small relative to the mar-
ket demand for the good or service. In this situation,
there is room in the market for many firms. A firm’s
minimum efficient scale
is the smallest output at
which long-run average cost reaches its lowest level.
(See Chapter 9, p. 188.)
In perfect competition, each firm produces a good
that has no unique characteristics, so consumers don’t
care which firm’s good they buy.
Firms in perfect competition are price takers. A
is a firm that cannot influence the market price
because its production is an insignificant part of the
Imagine that you are a wheat farmer in Kansas. You
have a thousand acres planted—which sounds like a
lot. But compared to the millions of acres in Colorado,
Oklahoma, Texas, Nebraska, and the Dakotas, as well
as the millions more in Canada, Argentina, Australia,
and Ukraine, your thousand acres are a drop in the
ocean. Nothing makes your wheat any better than any
other farmer’s, and all the buyers of wheat know the
price at which they can do business.
If the market price of wheat is $4 a bushel, then
that is the highest price you can get for your wheat.
Ask for $4.10 and no one will buy from you. Offer it
for $3.90 and you’ll be sold out in a flash and have
given away 10¢ a bushel. You take the market price.
Economic Profit and Revenue
A firm’s goal is to maximize
, which is
equal to total revenue minus total cost. Total cost is
of production, which includes
equals the price of its output
multiplied by the number of units of output sold
is the change in
total revenue that results from a one-unit increase in
the quantity sold. Marginal revenue is calculated by
dividing the change in total revenue by the change in
the quantity sold.
Figure 10.1 illustrates these revenue concepts. In
part (a), the market demand curve,
, and market
, determine the market price. The
market price is $25 a sweater. Campus Sweaters is
just one of many producers of sweaters, so the best it
can do is to sell its sweaters for $25 each.