Perfect Competition

Assumptions

• Many buyers and sellers
• Homogeneous products
• Free entry and exit
• Sufficient information
• No externalities → Externalities

Many sellers + homogeneous products → price takers → firm DC horizontal → $P = MR$.

Firm vs Market curves

	Firm (one, $q$)	Market (all, $Q$)
Demand	FDC: flat at $P$ ($= MR = AR$)	MDC: downward, given in the problem
Supply	FSC: $P = MC$ → $q = f(P)$	MSC: $Q = n \times q$ at the same $P$

Order: MSC = MDC → market $P$, $Q$ → firm $q = \frac{Q}{n}$ → firm costs (ATC, profit) use $q$, never $Q$.

The three “P = ?” conditions

Condition	What it says	When it holds	Why
$P = MR$	Firm demand curve is horizontal → each extra unit adds exactly P to revenue	Always for a PC firm (SR and LR)	Price taker: the firm’s output is too small to affect P → Market Power
$P = MC$	Rule for choosing the profit-maximizing q (how much to produce)	Whenever the firm produces (SR and LR)	$P > MC$ → extra unit adds profit → produce; $P < MC$ → extra unit loses money → don’t. Stop where $P = MC$ → Profit Maximization
$P = ATC$	Break-even: $\pi = (P - ATC) \times q = 0$	Possible in SR (one of 3 cases); guaranteed in LR	Free entry/exit: $\pi > 0$ → entry → P ↓; $\pi < 0$ → exit → P ↑; stops at $\pi = 0$ → Short-run and Long-run Equilibrium, Economic Profit

Links:

• $MR = MC$ is the general rule for any firm; PC substitutes $P = MR$ → $P = MC$. Monopoly: $P \neq MR$ → Monopoly
• LR: rows 2 + 3 hold together → $P = MC = \min ATC$ (MC crosses ATC at its minimum) → Allocative vs Productive Efficiency
• “Whether to produce” is a separate decision: SR $P \geq AVC$ / LR $P \geq ATC$ → Shutdown Rule