Perfect Competition (Cạnh Tranh Hoàn Hảo) – Microeconomics Study Notes

Perfect Competition

Introduction to Perfect Competition

Perfect competition is a fundamental market structure in microeconomics, characterized by a large number of firms producing identical products, free entry and exit, and perfect information. This chapter explores the features, behavior, and outcomes of perfectly competitive markets.

• Perfect competition is an idealized market structure where no single firm can influence the market price.

• Firms are price takers, meaning they accept the market price as given.

• Resources are allocated efficiently in the long run.

Key Features of Perfect Competition

• Many buyers and sellers: No individual can affect the market price.

• Homogeneous products: All firms sell identical products.

• Free entry and exit: Firms can freely enter or leave the market.

• Perfect information: All market participants have full knowledge of prices and technology.

• No barriers to entry: There are no obstacles preventing new firms from entering the market.

Market Structures Comparison

The following table summarizes the main characteristics of different market structures:

Market Structure	Number of Firms	Product Differentiation	Entry Barriers	Price Control
Perfect Competition	Many	None (Identical)	None	None (Price taker)
Monopolistic Competition	Many	Differentiated	Low	Some
Oligopoly	Few	Either	High	Some/Collusion possible
Monopoly	One	Unique	Very high	Significant

Firm Demand Curve in Perfect Competition

In a perfectly competitive market, the demand curve facing an individual firm is perfectly elastic at the market price. The firm can sell any quantity at this price but cannot influence the price by its own output decisions.

• Market demand curve: Downward sloping.

• Firm demand curve: Horizontal at market price (perfectly elastic).

Example: If the market price of wheat is $5 per bushel, each farmer can sell as much wheat as desired at $5, but cannot sell at a higher price.

Short-Run Production Decision

Firms maximize profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR). In perfect competition, MR equals the market price (P).

• Profit maximization rule: Produce where $MR = MC$.

• In perfect competition, $MR = P$.

Equation:

$MR = MC$

$P = MC$

Short-Run Supply Curve

The firm's short-run supply curve is the portion of its marginal cost curve above the average variable cost (AVC).

• If $P > AVC$, the firm produces where $P = MC$.

• If $P < AVC$, the firm shuts down in the short run.

Profit, Loss, and Shutdown Decisions

• Profit: If $P > ATC$, the firm earns economic profit.

• Loss but continue operating: If $AVC < P < ATC$, the firm covers variable costs and some fixed costs, so it continues to operate in the short run.

• Shutdown: If $P < AVC$, the firm should shut down in the short run.

Graphical representation: The area between price and ATC, above the MC curve, represents profit or loss.

Long-Run Equilibrium

In the long run, firms can enter or exit the market. Economic profit attracts new firms, increasing supply and lowering price until profit is zero. Losses cause firms to exit, reducing supply and raising price until losses are eliminated.

• In long-run equilibrium: $P = MC = ATC$

• Firms earn zero economic profit (normal profit).

Efficiency in Perfect Competition

• Allocative efficiency: Resources are allocated where $P = MC$.

• Productive efficiency: Firms produce at the lowest point on the ATC curve.

Consumer and Producer Surplus

Perfect competition maximizes total surplus (the sum of consumer and producer surplus), leading to the most efficient allocation of resources.

• Consumer surplus: The area above the market price and below the demand curve.

• Producer surplus: The area below the market price and above the supply curve.

Key Formulas

• Total Revenue (TR): $TR = P \times Q$

• Marginal Revenue (MR): $MR = \frac{\Delta TR}{\Delta Q}$

• Average Total Cost (ATC): $ATC = \frac{TC}{Q}$

• Average Variable Cost (AVC): $AVC = \frac{TVC}{Q}$

• Profit: $\text{Profit} = TR - TC$

Practice Problems and Applications

• Calculate profit-maximizing output given cost and price data.

• Determine shutdown point using AVC and price.

• Analyze the effects of entry and exit on market supply and price.

Glossary of Key Terms

Term	Definition
Perfect Competition	Market structure with many firms, identical products, and free entry/exit.
Price Taker	A firm that cannot influence market price and must accept it as given.
Marginal Cost (MC)	The additional cost of producing one more unit of output.
Average Total Cost (ATC)	Total cost divided by quantity produced.
Shutdown Point	The price below which a firm will cease production in the short run ($P < AVC$).

Additional info:

• These notes are based on textbook content and include expanded academic context for clarity.

• Tables and graphs are described in text; students should refer to their textbook for graphical details.