Pure Competition

Application of demand and supply

Externalties
Public goods
Role of government in the economy
 Profit-
maximizing in
the short-run
• Because the purely competitive firm is a
price taker, it can maximize its economic
profit (or minimize its loss) only by
adjusting its output. And, in the short run,
the firm has a fixed plant. Thus it can
adjust its output only through changes in
the amount of variable resources
Total-
(materials, labor) it uses. Revenue–
Total-Cost
Approach
 Total cost increases with
output because more
a break-even point : an
production requires more
output at which a firm
resources. But the rate of
makes a normal profit but
increase in total cost varies
not an economic profit
with the relative efficiency
of the firm.
• In the short run, the firm will maximize
profit or minimize loss by producing the
output at which marginal revenue equals
marginal cost (as long as producing is
preferable to shutting down).

Marginal-
• MR = MC rule
• The rule applies only if producing is
preferable to shutting down. We will show
shortly that if marginal revenue does not
equal or exceed average variable cost, the
Revenue–
firm will shut down rather than produce
the amount of output at which MR=MC.
Marginal-
• P=MC Cost
Approach
 Marginal
Cost and
Short-Run
Supply
The Long Run in
Pure
Competition
• In the long run firms already in an industry have sufficient
time either to expand or to contract their capacities.
• Assumptions:
1. Entry and exit only
2. Identical costs
3. Constant-cost industry
• After all long-run adjustments are completed, product price
will be exactly equal to, and production will occur at, each
firm’s minimum average total cost.
1. Firms seek profits and shun losses, and
2. under pure competition, firms are free to enter and leave
an industry.