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Perfect Competition in the Short Run: Understanding Supply and Profit
Dive into the world of perfect competition in the short run. Explore supply curves, market equilibrium, and economic profit. Enhance your microeconomics knowledge with our comprehensive video lessons and practice problems.

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Now Playing:Perfect competition in the short run – Example 0a
Intros
  1. Perfect Competition in the Short Run Overview:
  2. Short-Run Market Supply Curve
    • Quantities supplied by all firms
    • Profit maximized supply curve for each firm
    • Vertical, Horizontal, & Curves Up
    • Every firm has the same output
  3. Short-Run: Equilibrium, & Market Demand Changes
    • Demand curve is a downward sloping line
    • Intersection of Demand & Supply  \, →  \, equilibrium
    • Increase in Demand  \, →  \, Output  ↑ \, \uparrow \, Market Price  ↑ \, \uparrow \,
    • Decrease in Demand  \, →  \, Output  ↓ \, \downarrow \, Market Price  ↓ \, \downarrow \,
Examples
  1. Understanding Market Changes
    Suppose you have the following information for the costs of 1 firm. There are a total of 1000 firms.

    Output

    Total Cost

    0

    4

    1

    6

    2

    7

    3

    9

    4

    13

    5

    19


    You also have information about the market demand

    Price

    Quantity Demanded (in thousands)

    2

    30

    3

    25

    4

    20

    5

    15

    6

    10

    7

    5

    1. Derive the supply curve

    2. Find the market equilibrium in the short run

    3. If the demand increases, what happens to the output and price?

Perfect competition definitions
Jump to:NotesConceptFAQsPrerequisites
Notes
Short-Run Market Supply Curve

The short-run market supply curve shows the quantity supplied by all  \, the firms in the market as price varies.


Short-run market supply curve

The firms will do one of 3 things in the supply curve:

  1. At the shutdown price, firms will choose to either choose to shutdown, or produce the shutdown quantity.
  2. When the price is below the shutdown price, firms will shutdown and not produce.
  3. When the price is above the shutdown price, firms will produce at the given output.

Short-Run: Equilibrium, & Market Demand Changes

The short-run supply curve and the market demand curve determines the equilibrium price and quantity.


Short-run: equilibrium, & market demand changes

Note: The equilibrium is found at the intersection.


Recall that the market demand curve can change in 2 ways.


Case 1: The demand increases, causing the curve to shift rightward. The result would be an increase to both the market price and the output.


Case 2: The demand decreases, causing the curve to shift leftward. The result would be a decrease to both the market price and the output.


Short-run: equilibrium, & market demand changes

Short Run: Economic Profit & Loss

There are 3 possible outcomes in the short run for firms who are perfectly competitive.


Case 1: Suppose the demand curve is in D1D_1. Then the firm breaks even and does not gain any profit or loss. This is because p = ATC  \, at the profit-maximizing output.


Short run economic profit & loss

Case 2: Suppose the demand curve is in D2D_2. Then the firm gains economic profit. This is because p > ATC  \, at the profit-maximizing output.


Short run economic profit & loss

Case 3: Suppose the demand curve is in D3D_3. Then the firm has economic loss. This is because p < ATC  \, at the profit-maximizing output.


Short run economic profit & loss
Concept

Introduction to Perfect Competition in the Short Run

Perfect competition in the short run is a fundamental concept in microeconomics, crucial for understanding market dynamics. The introduction video provides a comprehensive overview of this topic, serving as an essential starting point for students and professionals alike. In perfect competition, numerous firms produce identical products, with no single entity having market power. The short run analysis focuses on how firms respond to market conditions when certain factors remain fixed. Understanding supply curves is vital, as they represent the relationship between price and quantity supplied by firms. Equally important are demand curves, which illustrate consumer behavior at various price points. The intersection of these curves determines the market equilibrium, where supply meets demand. This equilibrium is a key concept in perfect competition, as it establishes the price and quantity at which the market clears. By grasping these elements, one can better analyze firm behavior, market outcomes, and economic efficiency in perfectly competitive markets.

FAQs

Here are some frequently asked questions about perfect competition in the short run:

  1. What is the short-run supply curve for a firm in perfect competition?

    The short-run supply curve for a perfectly competitive firm is its marginal cost (MC) curve above the average variable cost (AVC) curve. This is because firms will produce as long as the market price is at least equal to their AVC. The firm's supply curve starts at the shutdown point, where price equals AVC.

  2. How does a perfectly competitive firm maximize profit in the short run?

    A perfectly competitive firm maximizes profit in the short run by producing at the level where marginal cost (MC) equals marginal revenue (MR), which is also equal to the market price. This is known as the profit-maximizing rule: P = MC = MR. The firm will produce at this level as long as the price is above its average variable cost.

  3. Can firms in perfect competition earn economic profits in the short run?

    Yes, firms in perfect competition can earn economic profits in the short run if the market price is above their average total cost (ATC). However, these profits are temporary and will attract new firms to enter the market in the long run, eventually driving the price down to the point where economic profits are zero.

  4. What is the difference between the short-run and long-run in perfect competition?

    In the short run, firms in perfect competition have fixed costs and can only adjust their variable inputs to change output. The number of firms in the market is also fixed. In the long run, all costs become variable, firms can enter or exit the market, and existing firms can adjust their scale of production.

  5. How does market equilibrium change in the short run for a perfectly competitive market?

    In the short run, market equilibrium in perfect competition can change due to shifts in either the demand or supply curve. If demand increases, the equilibrium price and quantity will rise, potentially leading to short-run profits for firms. If demand decreases, the opposite occurs. Supply shifts can also affect equilibrium, but the number of firms remains constant in the short run.

Prerequisites

Understanding the concept of perfect competition in the short run requires a solid foundation in key economic principles. One crucial prerequisite topic that plays a significant role in grasping this concept is market equilibrium. This fundamental concept is essential for students to comprehend before delving into the intricacies of perfect competition.

Market equilibrium forms the backbone of understanding how markets function and how prices are determined. In the context of perfect competition in the short run, market equilibrium provides the necessary framework to analyze how firms operate and make decisions. By mastering the principles of market equilibrium, students can better grasp the dynamics of supply and demand that drive perfect competition.

When studying perfect competition in the short run, the concept of market equilibrium becomes particularly relevant. In a perfectly competitive market, firms are price takers, meaning they must accept the prevailing market price. This price is determined by the intersection of supply and demand curves, which is precisely what market equilibrium represents.

Furthermore, understanding market equilibrium helps students comprehend how short-run changes in the market affect individual firms in a perfectly competitive environment. For instance, shifts in demand or supply can lead to new equilibrium prices and quantities, which in turn influence the decisions of firms operating in the market.

The principles of market equilibrium also provide insights into the concept of economic profits in the short run. In perfect competition, firms may earn economic profits or losses depending on how the market price compares to their average total cost. This analysis is rooted in the understanding of market equilibrium and how it affects individual firms.

Moreover, grasping the concept of market equilibrium aids in understanding the process of market adjustment in perfect competition. As firms enter or exit the market in response to profits or losses, the market moves towards a long-run equilibrium. This dynamic process is better understood when students have a solid grasp of how market equilibrium works.

In conclusion, market equilibrium serves as a crucial prerequisite for understanding perfect competition in the short run. It provides the necessary foundation for analyzing market dynamics, firm behavior, and the forces that drive competitive markets. By mastering this prerequisite topic, students will be better equipped to tackle the complexities of perfect competition and develop a more comprehensive understanding of microeconomic principles.