Perfect Competition


  1. Zero profit condition:

  2. Pricing at marginal cost:

    1. ! only when is constant…
  3. Theory of the Firm but with…

    • Fixed costs, i.e.
    • Firms will enter and exit
      • ⇒ supply price and quantity is at
    • → market price and individual firm’s quantity supplied are determined by this formula.
    • This is equivalent to the minimum average cost condition .
  4. Utility Maximization but…

    • Consider only one good,
    • There are more than one consumers.
  5. Market equilibrium:

    • Price is set at because it is fully determined by the firm.
      • The quantity supplied changes by firms entering and exiting (not by individual firms ramping up or cutting down on production!)
    • Quantity demanded (=aggregate quantity supplied) of is fully determined by the consumer.

Short Run