Perfect Competition
| English | Chinese | Pinyin |
|---|---|---|
| perfect competition | 完全竞争 | wán quán jìng zhēng |
| free entry and exit | 自由进出 | zì yóu jìn chū |
| price taker | 价格接受者 | jià gé jiē shòu zhě |
| profit | 利润 | lì rùn |
| loss | 亏损 | kuī sǔn |
| productive efficiency | 生产效率 | shēng chǎn xiào lǜ |
| allocative efficiency | 配置效率 | pèi zhì xiào lǜ |
When no one can set the price
- Picture a thousand wheat farms selling exactly the same grain.
- No single farm is big enough to nudge the market price.
- Each must simply accept whatever price the market gives.
- This extreme case, perfect competition 完全竞争, is the benchmark for every other market.
The features of perfect competition
- Many tiny firms, selling identical products, with free entry and exit 自由进出 and perfect information.
- Because each firm is tiny and its product identical, it is a price taker 价格接受者 — it cannot set its own price.
- So the demand curve it faces is horizontal, and $P = AR = MR$.
A perfectly competitive firm is a price taker, which means it:
It is too small to influence the price, so it takes the market price as given.
For a competitive firm, price equals average revenue and also equals ______ revenue.
Because every unit sells at the same price, P = AR = MR.
Select all features of a perfectly competitive market.
Many firms, identical products, and free entry/exit define perfect competition; one controlling firm is a monopoly.
Short-run equilibrium
- The firm still produces where $MR = MC$; since $P = MR$, it produces where $P = MC$.
- Compare price with ATC at that quantity:
- $P > ATC$ → a profit 利润; $P = ATC$ → break-even; $P < ATC$ (but $\geq AVC$) → a loss 亏损, still producing.
The competitive firm
A price-taking firm faces a horizontal demand at the market price and produces where P = MC. In the long run, entry and exit push it to P = minimum ATC.
A wheat farm sells at P = 5, produces Q = 1000 where MC = 5, and has ATC = 4. What is its short-run economic profit?
Profit = (P − ATC) × Q = (5 − 4) × 1000 = 1000. That profit attracts new farms to enter.
Long-run efficiency
- Free entry and exit erase any profit or loss, so the long run settles at $P = MC = \text{minimum } ATC$.
- Productive efficiency 生产效率: output is made at the lowest possible cost ($P = \text{minimum } ATC$).
- Allocative efficiency 配置效率: the right amount is made ($P = MC$).
- Achieving both at once is why perfect competition is the efficiency benchmark.
In long-run equilibrium, a perfectly competitive firm produces where:
Entry and exit drive economic profit to zero at P = MC = minimum ATC.
Match each type of efficiency to its condition.
Perfect competition achieves both at once in the long run.
A perfectly competitive firm is a price taker with $P = AR = MR$. It produces where $P = MC$, earning a profit, break-even, or loss short-run. Free entry and exit drive the long run to $P = MC = \text{minimum } ATC$ — both productive and allocative efficiency.