Perfect Competition

1. Many firms
2. Produce homogenous (similar) products
3. Easy for a firm to enter/exit the market
Ex: charging cables, socks, homemade jewelry,
MAIN FEATURE: Price-taking

Example: coffee shop

Price of cup = $2.50, Wage = $10/hr, Fixed Cost = $1000
(p. 13 of notebook)
# of cups Sales Revenues Total Cost

600 600 x $2.50 = $1500 $1500 (50 hrs x $10 + $1000)

900 900 x $2.50 = $2250 $2000

1150 $2875 $2500

1350 $3375 $3000

1500 $3750 $3500

1600 $4000 $4000

Sales revenues = Total revenue (TR)
Profits = Total Revenue (TR) - Total Costs (TC)

Marginal Revenue Marginal Cost (MC)

Price MC

$2.50 $0.8

$2.50 $500/(900-300) = $1.67

$2.50 $500/(1150-900) = $2

$2.50 $2.50

$2.50 $3.33

$2.50 $5

Most profitable quantity is that at which price = marginal cost for that quantity (P = MC)
- Could be that P < AC, ie the firm makes a loss
 PROFIT

Exit (can’t pay for AVC Stay in

business
Price
AVC A
C

When many firms enter the market, the supply curve shifts to the right and the equilibrium price
goes down.
- Long run usually results in 0 long-run profits