4 MARKET STRUCTURES Profit = MC to ATC

 PERFECT COMPETITION
 MONOPOLISTIC COMPETITION
 OLIGOPOLY
 MONOPOLY

PERFECT COMPETITION

 Many small firms (a lot of competition)

 Many sellers and buyers
 Low or no barriers to entry and exit
 Identical/homogeneous products (perfect
substitutes)
 Firms are passive price-takers
 Buyers & Sellers have perfect information Loss = ATC to MC (based on price/quantity)
 Idealized state/doesn’t exist in the real world
 Perfectly elastic

Total Revenue = Q=MR

Total Cost = Q=ATC

Profit/Loss = MR & ATC

MR = D = AR= P

Zero-Profit Point/Break Even Point (MC = ATC)

Shutdown Point (MC = AVC)

Quantity (MR = MC)

Total Revenue = P(Q)

Total Cost = ATC(Q)

Profit = TR - TC
Profit/Loss is only in the short-run

Increase in Supply – Decrease in Price

Eventually, every firm in the market is going to make

no economic profit. But Total Revenue can still cover
all the explicit and implicit costs.

If firms are making a loss, eventually, some of those

firms are going to leave.

Supply Curve - shift to the left

Unlike monopolies, and other market structures,

perfectly competitive firms are extremely efficient (in
the long run)

They have both allocative and productive efficiency.

Allocative Efficiency – the firm is producing the

amount society wants, where P=MC.

Productive Efficiency – The firm is producing at the

lowest possible cost, where ATC is maximized.

Perfect Competition has no deadweight loss.

PROFIT MAXIMATION

Economic profit = TR - all economic costs

Economic costs include all opportunity costs

(explicit and implicit)

Economic Profit (w/ opportunity costs)

Accounting Profit = normal profit

Increase in Profit (TR > TC)

Decrease in Profit (TR < TC)

Marginal Revenue (MR) – additional revenue from the

sale of an additional unit of output

Marginal Cost (MC) - additional cost from the sale of

an additional unit of output

MR > MC - Increase production to increase profits

MR < MC - Decrease production to increase profits

MR = MC - Maximized profit