Perfect competition is a market structure characterized by a large number of firms in the market, an undifferentiated product, ease of entry into the market, and complete information available to all market participants.
Price-taker is a characteristic of a perfectly competitive market in which the firm cannot influence the price of its product, but can sell any amount of its output at the price established by the market.
Profit maximization is the assumed goal of firms, which is to develop strategies to earn the largest amount of profit possible. This can be accomplished by focusing on revenues or costs or both factors.
Profit-maximizing rule is that to maximize profits, a firm should produce the level of output where marginal revenue equals marginal cost.
Marginal revenue for the perfectly competitive firm is a horizontal line on the supply and demand curve because the firm can sell all units of output at the market price, given the assumption of a perfectly elastic demand curve. Price equals marginal revenue for the perfectly competitive firm.
Shutdown point for the perfectly competitive firm. The price, which equals a firm's minimum average variable cost, below which it is more profitable for the perfectly competitive firm to shut down than to continue to produce.
Supply curve for the perfectly competitive firm. The portion of a firm's marginal cost curve that lies above the minimum average variable cost.
Supply curve for the perfectly competitive industry. The curve that shows the output produced by all perfectly competitive firms in the industry at different prices.
Equilibrium point for the perfectly competitive firm is the point where price equals average total cost because the firm earns zero economic profit at this point. Economic profit incorporates all implicit costs of production, including a normal rate of return on the firm's investment.
Economies of Scale achieve lower unit costs of production by adopting a larger scale of production, represented by the downward sloping portion of a long-run average cost curve.
Diseconomies of Scale incur higher unit costs of production by adopting a larger scale of production, represented by the upward sloping portion of a long-run average cost curve.
Industry concentration is a measure of how many firms produce the total output of an industry. The more concentrated the industry the fewer the firms operating in that industry.
Price-cost margin (PCM) is the relationship between price and costs for an industry, calculated by subtracting the total payroll and the cost of materials from the value of shipments and then dividing the results by the value of the shipments. The approach ignores taxes, corporate overhead, advertising and marketing, research, and interest expenses.
SUMMARY: Perfect competition is a form of market structure in which individual firms have no control over product price, which is established by industry or market demand and supply. In the short run, perfectly competitive firms take the market price and produce the amount of outp tht atmaximizes their profits. Profist earned in the short run can be positive, zero, or negative. Perfectly competitive firms are not able to earn positive economic profist in the long run because these profist will be competed away by entry of other firms. Likewise, any losss will be competed away by frims leaving the industry.
To lower their costs, firms also seek to produc at the optimal scale of operation. However, this scale will be adopted by all firms in the long run, and entry will force prices to equal long-run average cost, the zero-profit equilibrium.
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