The Model of Perfect Competition Part III

1
The Model of Perfect Competition - Part III

• Microeconomics - Dr. D. Foster

2
Perfect Competition - An Ideal

• Firms are primarily distinguished from each other
  by the degree of competition they face

• Profit maximization.
• The Model of Perfect Competition.
• Allocative and Productive efficiencies.
• SR LR adjustments to changes in costs.
• The paradox of taxing economic profits other
  stories.
• Long-run costs and long-run supply.

3
Efficiency

• Allocative Efficiency (What to produce?)

occurs when Price Marginal Cost Why ?
Productive Efficiency (How to produce?)
occurs where output level is at the minimum
ATC Why ?
4
Perfect Competition Efficiency
Perfectly competitive firms always charge a price
MC. Why?
In the LR, perfectly competitive firms produce at
min. ATC. Why?

• Perfectly competitive firms are always
  Allocatively Efficient

In the LR, perfectly competitive firms are
Productively Efficient
5
Perfect Competition in LR

• We know that in SR, firms can earn a positive,
  or negative, economic profit. What happens in
  the long run?

6
Perfect Competition in LR

• If a firm earns positive economic profit, in the
  long run that will be dissipated as firms enter.

MC
ATC
MR d
Pe
In the LR, this firm earns 0 econ profit.
q
qe
A Firm
7
Perfect Competition in LR

• If a firm earns negative economic profit, in the
  long run that will be eliminated as firms exit.

ATC

MC
MR d
Pe
In the LR, this firm earns 0 econ profit.
q
qe
A Firm
8
The Paradox of Taxing Economic Profit

• With the tax, economic profit 0

In the short run, there are no consequences!
P

MC
S
ATC
Pe MR d
Pe
D
q
Q
qe
Qe
A Firm
The Market
9
The Paradox of Taxing Economic Profit

• In the short run, there are no consequences!
• But, what about the long run?

Firms no longer earn an economic profit. No firms
will enter into this market. The price will not
fall the output will not rise.
10
The Model of Perfect Competition - Part III

• Microeconomics - Dr. D. Foster