Perfectly Competitive Markets (Profits and Costs (Sunk Costs (Refers to…
Perfectly Competitive Markets
Assumptions about Perfect Competition
There are many consumers within a given market. 2. There are many producers. 3. All sellers sell the same product.
Profits and Costs
Also known as economic profit, it refers to the firm when total revenue earned is greater than the total costs.
Refers to an economic condition that occurs when the difference between a firm's total revenue and total cost is equal to zero. Normal profit is the minimum level of profit needed for a company to remain competitive in the market.
Refers to costs that a firm will incur even when a firm shuts down temporarily
Example: If a firm has a long-term lease with the landlord, the rent must continued to be paid even when the firm is not operating
Limitations of Perfect Competition
there are very few barriers to entry implying that any firm can enter the market and start selling the product
This means that old firms cannot afford to be complacent because chances of losing to new firms always loom over them.
There is no incentive for firms to innovate or add new features to a product because in the case of perfect competition, the price margin is fixed.
The Firm in the Short-run
Refers to when a firm achieves normal profit in the short-run.
Refers to a short-run decision to stop production temporarily, perhaps because of poor market conditions.
This is different from
as that is a decision in the long-run to end production permanently.
Profit maximization occurs at the quantity where marginal revenue equals marginal cost.