Acceptable logotypeECO 2030. Principles of Economics-Price Theory

Perfect Competition

Competitive Markets
  1. Many buyers and sellers
  2. Homogeneous products
  3. Free entry and exit
  4. Profit = 0

Revenue

  1. TR = PQ
  2. AR = PQ/Q = P
  3. MR = ΔTR/ΔQ = PΔQ/ΔQ = P

Short Run Profit Maximization

  1. Set Q so that MR = P = MC
  2. Shut down if P < AVC
  3. Short run supply curve: S = MC > AVC

Long Run Entry and Exit

  1. Profit = (P - ATC) × Q
  2. Enter if P > ATC
  3. Exit if P < ATC
  4. Long run equilibrium: economic profit = 0

Comparative Statics

  1. Demand increase
  2. Demand decrease
  3. Supply increase
  4. Supply decrease