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Perfect Competition

Four Market Model Summary: Perfect Competition


Four Market Model Summary: Perfect Competition

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Alright guys, we've done it. We've discussed perfect competition in quite a lot of detail. So let's go ahead and go back to that first page are four market model summary page and let's fill in that column for perfect for perfect competition. So let's do that. So here we go. I've I've chopped off all the other columns and we've got our perfect competition column. So we started, we knew our number of firms, right? The number of firms were gonna be almost infinite. There's so many firms in this market that nobody no, no single firm can influence the price, right? They can produce as much as they want, but it's still just a tiny fraction of the total uh supply of the whole market, right? So there's an almost infinite amount of firms and we saw some examples, right? We usually talk about wheat, right? Or some sort of agricultural product when we talk about um perfect competition. And we also discussed foreign exchange markets, right? When you're trading a dollar for a euro or something like that, you can't tell $1 from another dollar, €1 from another euro, right? And there's gonna be this price that you have to take on the market and foreign exchange. Cool. So we foreign exchange, those are good examples barriers to entry. Okay, so we haven't really discussed what a barrier to entry is yet, but the idea here is barrier to entry would be something stopping you from entering the market, right? A firm wants to enter the market and they can't But we said here firms can freely enter and exit the market, right? If you wanted to start producing wheat, you just buy a farm and start producing wheat, right? So there's no barriers to entry here. Anybody can get involved. There's none. Right? No barriers to entry. And how about that profit maximizing quantity? Well, we've we've been discussing this right, left and right. It's always gonna be marginal. Revenue equals marginal cost. All right. We're gonna find where marginal revenue equals marginal cost. And then that's at that point, is what the quantity we're gonna look on our quantity access, and we'll see what quantity we want to produce uh to maximize profit. Okay, so marginal revenue equals marginal cost. That's our profit maximizing quantity. About this next one. Long run profitability. What we saw in the long run firms were not gonna be able to make an economic profit, right? No economic profit. Right. And that's because in the long run, the the price stabilizes at the minimum of the average total cost. Price will be equal to average total cost. And there's no profit there. Okay, So long run, no economic profit. But remember economic profit includes opportunity cost. Right? So there is accounting profit. When we just think about dollar amounts. Cool, Alright, how about the relation between the price and remember, price is always gonna equal average revenue, right? We did the proof of that in our revenue video. So price always equals average revenue for all market structures, but for perfect competition, the price is also going to equal the marginal revenue, right? Price equals marginal revenue here. I'm gonna write all three in there because we've been using this um this equation quite a bit right. Price equals the average revenue equals the marginal revenue right there, all one line and we see that flat line where the price equals the marginal revenue. And this is the only case where we're gonna see price equal marginal revenue. All right. And all the other cases, we're gonna have to draw a separate curve for our marginal revenue. So, last but not least, the relationship between price and marginal cost. When we saw in perfect competition that the price equals the marginal cost as well. Right. And this is what led us to those conclusions about efficiency where we were being productively efficient or allocated lee efficient. Either way we see that the price equals the marginal cost because we produce, remember we're producing where marginal revenue, whoops, we're producing up here where marginal revenue equals marginal cost. Right? So if the price equals marginal revenue and the price equals marginal cost, right? That is gonna be the point where we produce, right? We're gonna find the point where marginal cost crosses that price line and that's where we produce. So marginal cost equals marginal revenue. And they both equal price. Cool. So one more quick note here, this isn't all income. Right? We talked about other things in this chapter, we talked about the short run, shut down the long run exit. We mentioned efficiency as well, so this doesn't really catch everything that we've discussed. There's more details than we can just put on this sheet. But this is a good summary of a lot of the big picture stuff that we've discussed. All right, so let's go ahead and move on to our next market structure in the next unit. Cool. Alright, guys, I'll see you there.