The document discusses the concept of perfect competition in economics. It defines key characteristics of a perfectly competitive market including many buyers and sellers, standardized products, and free entry and exit. Firms in a perfectly competitive market are price takers and will produce at the quantity where marginal revenue equals marginal cost to maximize profits in the short run. The document uses graphs and tables to illustrate how a competitive firm determines optimal output and profits under different market price conditions.

6. Exhibit 1: Market Equilibrium and the Firm’s Demand Curve in Perfect Competition Bushels of wheat per day $5 0 1,200,000 S D P r i c e p e r b u s h e l (a) Market Equilibrium P r i c e p e r b u s h e l $5 0 Bushels of wheat per day d 5 10 15 (b) Firm’s Demand Market price of wheat of $5 per bushel is determined in the left panel by the intersection of the market demand curve and the market supply curve. Once the market price is established, farmer can sell all he or she wants at that market price  price taker

8. (1) (2) (3) = (1)  (2) (4) (5) (6) = (4) + (1) (7) = (3) - (4) Bushels of Marginal Wheat Revenue Total Total Marginal Average Economic per day (Price) Revenue Cost Cost Total Cost Profit or (q) (p) (TR = q  p) (TC) MC=  TC/  Q ATC = TC / q Loss = TR - TC 0 -- $0 $15.00 -- -$15.00 1 $5 5 19.75 $4.75 $19.75 -14.75 2 5 10 23.50 3.75 11.75 -13.50 3 5 15 26.50 3.00 8.83 -11.50 4 5 20 29.00 2.50 7.25 -9.00 5 5 25 31.00 2.00 6.20 -6.00 6 5 30 32.50 1.50 5.42 -2.50 7 5 35 33.75 1.25 4.82 1.25 8 5 40 35.25 1.50 4.41 4.75 9 5 45 37.25 2.00 4.14 7.75 10 5 50 40.00 2.75 4.00 10.00 11 5 55 43.25 3.25 3.93 11.75 12 5 60 48.00 4.75 4.00 12.00 13 5 65 54.50 6.50 4.19 10.50 14 5 70 64.00 9.50 4.57 6.00 15 5 75 77.50 13.50 5.17 -2.50 16 5 80 96.00 18.50 6.00 -16.00 Exhibit 2: Short-Run Costs and Revenues

25. Exhibit 9: Long Run Equilibrium for the Firm and the Industry p 0 d Quantity per period MC ATC e LRAC q Dollars per unit p 0 Q Quantity per period Price per unit D (a) Firm (b) Industry, or market In the long run, market supply adjusts as firms enter or leave, or change their size. This process continues until the market supply intersects the market demand at a price that equals the lowest point on each firm’s long-run average cost curve, at point e with each firm producing q units. At point e , marginal cost, short-run average total cost and long-run average cost are all equal. S

31. Exhibit 12: An Increasing-Cost Industry p a 0 d a ATC MC a Quantity per period (a) Firm p a 0 S D a Q a Quantity per period (b) Industry, or Market Dollars per unit Price per unit q The initial position of equilibrium is shown at point a , where the initial market demand and supply curves are D and S - the market price is p a and the market quantity Q a – the demand and marginal revenue curve facing each firm is d a – the firm produces q , average total cost is at a minimum: firm earns no economic profit in this long-run equilibrium

32. Exhibit 12: An Increasing-Cost Industry p a 0 d a ATC MC a Quantity per period (a) Firm p a 0 S D a Q a (b) Industry, or Market Dollars per unit Price per unit b b p b d q b b p D ' b Q b q Increase in market demand is shown by the shift from D to D‘, which intersects the short-run market supply curve S at point b : short-run equilibrium price p b and market quantity Q b – each firm’s demand curve shifts from d a up to d b – b in the left panel where the marginal cost curve intersects the new demand curve – each firm produces q b: economic profit equal to q b times the difference between the p b and the average total cost at that rate of output Quantity per period

33. Exhibit 12: An Increasing-Cost Industry Dollars per unit p a 0 d a ATC MC a Quantity per period (a) Firm p a 0 S D a Q a Quantity per period (b) Industry, or Market Price per unit q c c c c p d ATC' MC' p S' c Q c The existence of economic profit attracts new entrants but because this is an increasing-cost industry, new entrants’ increased demand for resources drives up the costs of production and raises each firm’s marginal and average cost curves. In the left panel, MC and ATC shift up to MC' and ATC'. The entry of the new firms also shifts the short-run industry supply curve outward from S to S'  decline in the market price from b to c . b b p b d q b b p D' b Q b

34. Exhibit 12: An Increasing-Cost Industry p a 0 d a ATC MC a Quantity per period (a) Firm p a 0 S D a Q a Quantity per period (b) Industry, or Market Dollars per unit Price per unit q c c c c p d ATC' MC' p S' c Q c A combination of a higher production cost and a lower price squeezes economic profit to zero: S'. Market price does not fall back to initial equilibrium level because each firm’s ATC shifted up with the expansion of industry output. New long-run market equilibrium occurs at point c, and when points a and c are connected, we get the upward sloping long-run market supply curve shown as S* S* b b p b d q b b p D' b Q b