Perfect competition: firm and industry
| English | 中文 | Pinyin |
|---|---|---|
| price taker/praɪs ˈteɪkə/ | 价格接受者 | jià gé jiē shòu zhě |
| competitive equilibrium | 竞争均衡 | jìng zhēng jūn héng |
A decision you can investigate
- One small producer accepts the market price; it cannot increase the entire industry price by making one extra unit. If many firms enter, industry supply can change.
- Keep the individual firm’s horizontal demand separate from the market’s demand and supply.
Build the explanation
- Perfect competition assumes many buyers and sellers, homogeneous output, good information, free entry/exit and no individual firm able to influence price. The industry price is determined by market demand/supply; the firm takes that price, so P=AR=MR. With its own costs, it chooses a feasible profit-maximizing output where rising MC crosses MR, checking shutdown and boundaries. In the short run some costs/capacity are fixed and positive economic profit or losses can occur.
- In the standard identical-firm constant-cost long-run model, profits encourage entry and losses encourage exit. Industry supply adjustment moves price toward minimum LRAC and normal economic profit, with P=MC=minAC at the efficient scale. This supports allocative efficiency without externalities and productive efficiency under the specified technology. In the short run P=MC can hold while output is away from minimum AC, so productive efficiency is not guaranteed. A firm with receipts below avoidable cost should shut down rather than operate just because MC equals price at some point.
Work through the evidence
- A fictional competitive firm has TC=100+2Q+0.1Q², MC=2+0.2Q and AVC=2+0.1Q. At market price10, choose Q40: TR400, TC340 and economic profit60. At price6, choose Q20: TR120, TC180 and loss60, better than closure loss100 because variable cost80 is covered. At price1, every positive output has AVC above2 and above price, so closing minimizes the short-run loss; a positive-output MR=MC solution does not exist.
- The model’s AC=100/Q+2+0.1Q reaches its minimum at Q=√1000≈31.6228, with AC≈8.3246 and MC the same. If identical firms can enter/exit, input prices and technology remain fixed, and market demand supports viable firms, that price/output is the long-run normal-profit benchmark. Entry shifts industry supply; it is not the existing firm moving its own demand curve by choice.
What is economic profit at price10 and Q40?
TR400−TC340=60.
At price6, what output satisfies the rising-MC condition?
6=2+0.2Q impliesQ20, with operating receipts covering variable cost.
A short-run competitive firm must always operate at minimum average cost.
Given price and fixed capacity, MR=MC can select output away from the AC minimum.
Test the limits
- The numerical long-run comparison assumes this schedule gives the lowest attainable cost at each feasible positive output, with no cheaper plant omitted; setup cost100 becomes avoidable on exit. The quadratic case has AVC rising with Q and lower bound2 as Q approaches0; it is not the usual U-shaped AVC curve with an interior minimum. The general shutdown rule compares revenue with avoidable cost at the best operating output; the numerical price1 is safely below all positive-output AVC here.
- Long-run normal profit does not mean the owner receives nothing: normal returns are included in economic costs. Rising industry input costs, non-identical firms, externalities, information problems or entry restrictions change the benchmark. Perfect competition is a model, not a claim that any market with many shops meets every assumption. Static efficiency does not automatically prove strong dynamic innovation or equal distribution.
What explains long-run entry in the standard model?
Entry changes industry supply and competitive conditions.
Apply and explain your answer
- Why can the firm rationally operate at price6 despite a loss?
- Revenue120 covers variable cost80 and contributes40 to unavoidable fixed cost100, leaving loss60 rather than closure loss100.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- price taker 价格接受者: A firm unable to influence the market price through its own output choice in the stated model.
- competitive equilibrium 竞争均衡: Consistent market and firm decisions under the stated competitive assumptions and time horizon.
A fictional competitive firm has TC=100+2Q+0.1Q², MC=2+0.2Q and AVC=2+0.1Q. At market price10, choose Q40: TR400, TC340 and economic profit60. At price6, choose Q20: TR120, TC180 and loss60, better than closure loss100 because variable cost80 is covered. At price1, every positive output has AVC above2 and above price, so closing minimizes the short-run loss; a positive-output MR=MC solution does not exist. The model’s AC=100/Q+2+0.1Q reaches its minimum at Q=√1000≈31.6228, with AC≈8.3246 and MC the same. If identical firms can enter/exit, input prices and technology remain fixed, and market demand supports viable firms, that price/output is the long-run normal-profit benchmark. Entry shifts industry supply; it is not the existing firm moving its own demand curve by choice.
The numerical long-run comparison assumes this schedule gives the lowest attainable cost at each feasible positive output, with no cheaper plant omitted; setup cost100 becomes avoidable on exit. The quadratic case has AVC rising with Q and lower bound2 as Q approaches0; it is not the usual U-shaped AVC curve with an interior minimum. The general shutdown rule compares revenue with avoidable cost at the best operating output; the numerical price1 is safely below all positive-output AVC here. Long-run normal profit does not mean the owner receives nothing: normal returns are included in economic costs. Rising industry input costs, non-identical firms, externalities, information problems or entry restrictions change the benchmark. Perfect competition is a model, not a claim that any market with many shops meets every assumption. Static efficiency does not automatically prove strong dynamic innovation or equal distribution.
Perfect competition assumes many buyers and sellers, homogeneous output, good information, free entry/exit and no individual firm able to influence price. The industry price is determined by market demand/supply; the firm takes that price, so P=AR=MR. With its own costs, it chooses a feasible profit-maximizing output where rising MC crosses MR, checking shutdown and boundaries. In the short run some costs/capacity are fixed and positive economic profit or losses can occur.