price taking - firms take market price as given
- individual firms sell sufficiently small part of total market output
- firms can't decide what market price is in a perfectly competitive situation
- consumers also act as price takers
- individual decisions do not affect the outcome of the whole
product homogeneity - firms produce nearly identical products
- products essentially perfect substitutes for each other >> very elastic
- commodities - homogeneous materials such as raw metals, oil, gasoline, vegetables, fruit
- consumers don't really care what specific firm made which
- name brands (ie. Nike, Adidas, Bluebell) not taken into consideration in perfectly competitive situations
- helps ensure a single market price
free entry/exit - no costs for new firm to enter/exit industry
- lets consumers switch from 1 supplier to another
- firms can enter if it sees profit, exit if losing profit
- medical, high-tech firms not perfectly competitive
- need research, patents, investment (entry costs) to sell in market
- large number of firms or hight elasticity can lead to high competition
profit maximization - price fixed, so cost needs to be minimized
- dominates most decisions w/ small firms
- larger firm >> owners have less contact w/ managers >> managers have more leeway to act on their own
- managers may be more focused on short-run than long-run
profit - difference between total revenue and total cost
- p(q) = R(q) - C(q)
- R(q) = Pq
- profit maximized where difference between revenue and cost is greatest
- marginal revenue - slope of revenue curve, change in revenue after one-unit increase in output
- MR(q) = MC(q) = P
- marginal gain in revenue equals marginal gain in cost at max profit
- firms in a large market >> face horizontal demand curve
- market demand still downward sloping, but market is so elastic for each firm (price taker) that individual firms face a different demand curve
- marginal revenue, average revenue, price all equal on demand curve for individual firms
- output rule - if firm produces anything, it should produce at the level where marginal revenue equals marginal cost
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