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Econ211 Lectures: Chapter 8: Perfect Competition
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 Lesson 8.1: What Is Perfect Competition? A. A Market Is a Perfect Competitive If: a. The industry has many firms and many customers. b. Sellers and buyers have all relevant information to make rational decisions about the product being transacted. c. All firms produce identical products. d. Fi...

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  • January 16, 2025
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  • 2024/2025
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1/7/25, 4:12 AM Econ211 Chapter 8 Lecture




Econ211 Lectures:

Chapter 8: Perfect Competition


 Lesson 8.1: What Is Perfect Competition?


A. A Market Is a Perfect Competitive If:
a. The industry has many firms and many customers.
b. Sellers and buyers have all relevant information to make rational decisions
about the product being transacted.
c. All firms produce identical products.
d. Firms can freely enter the competition or leave it.
A perfectly competitive firm is called price taker because the pressure of
competing firms forces them to accept the prevailing equilibrium price in the
market.

B. Market Price in Perfect Competition:
a. The market price is determined solely by supply and demand in the entire
market and not the individual firm.
b. If a firm in a perfectly competitive market raises the price of its product, it will
lose all of its sales to competitors.
c. And if it will not make economic sense for them to change below the market
price.
d. A perfect competitive firm faces a horizontal demand curve at the market
price.




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, 1/7/25, 4:12 AM Econ211 Chapter 8 Lecture




 Lesson 8.2: Profit maximization in Perfect Competition:

A. What Quantity to Produce?
a. A perfectly competitive firm must accept the price for its output as determined
by the product’s market demand and supply.
b. The perfectly competitive firm can choose to sell any quantity of output at
exactly the same price.
c. Therefore, the firm faces a perfectly elastic demand curve for its product:
Buyers are willing to buy any number of units of output from the firm at the
market price.
d. When the firm chooses what quantity to produce, the quantity will determine
the firm’s total revenue, total costs, and level of profits.

B. Output Decisions: Revenues, Costs, and Profit Maximization:
a. Total revenue (TR): the total amount that a firm takes in from the sale of its
product: the price per unit times the quantity of output the firm decides to
produce
Total revenue = Price x Quantity
TR = P x q
b. To maximize the profit, firms should maximize the difference between
revenue and cost
Profit(π) = Total revenue (TR) – Total cost (TC)

C. Profit = Total revenue – Total cost:
a. A perfectly competitive firm can sell as large a quantity as it wishes, as long as
it accepts the prevailing market price.
b. Total revenue is going to increase as the firm sells more.
Example:
Consider the case of a small farmer who produces raspberries and sells them
frozen for $4 per pack.




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