5.2 Perfect Competition
in the Short Run
A perfect competitor is a price taker, so it must accept the price
dictated by the market
Thus, the individual business’s demand curve is different than the
market demand curve
Recall, Market Demand Curve (Dm) has a negative slope, since
price and quantity are inversely related
Since a perfect competitor is one of
many businesses in a market, the
quantity it chooses to supply has no
effect on equilibrium price and
quantity in the market
Demand Faced by a
Perfect Competitor
Equilibrium occurs where the market demand and supply curves
meet (graph on left)
The equilibrium price sets the position of the business’s demand
curve (graph on right)
Revenue Conditions
When demand curve is horizontal, the perfect competitor’s total
revenue is the product’s price x quantity of output
>Average Revenue: a business’s total revenue per unit of output
>Marginal Revenue: the extra additional revenue earned from an
additional unit of output
∆𝑇𝑅
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑀𝑅 =
∆𝑞
>For a perfect competitor, average and
marginal revenues are always equal.
Profit Maximization
Regardless of market type, a business can maximize its profit
using:
Profit-Maximizing Output Rule: Produce at the level of output
where marginal revenue and marginal cost intersect
Total Profit is the area of the rectangle PABC
Breakeven & Shutdown Points
A business’s breakeven point (where price and average cost are
equal) occurs when:
Average Revenue (Price) = Average Cost
A business’s shutdown point occurs at the level of output where
price (average revenue) = minimum average variable cost
Supply Curve for a
Perfect Competitor
At the point where MC = MR1, the price P1 exceeds average cost,
and positive economic profits are made.
At the point where MC = MR0, we have the breakeven point,
where price = average cost
At the point where AVC equals price P2 is the business’s shutdown
point
After the last point, the average
variable costs would exceed price
Business & Market Supply Curve
Business Supply Curve – Sb
Market Supply Curve – Sm
If you’re given the Supply Curve for a business, then in order to
make the supply curve for the market:
>Keep the prices on the vertical axis the same
>See how many identical businesses make up the market
>Multiply the quantities (x-axis) by the number of identical
businesses and you have your new x-axis points