W1.1 Market Structure & Perfect Competition

Key points

• PC = price taker (many sellers, homogeneous product) → firm DC horizontal → $P = MR$
• How much to produce: any firm sets $MR = MC$ (MC rising); in PC → $P = MC$
• Whether to produce: SR $P \ge AVC$ (FC paid anyway), LR $P \ge ATC$; “stop adding units” ≠ shut down
• SR: number of firms fixed; profit or loss depends on $P$ vs $ATC$
• LR: free entry/exit → zero economic profit (normal profit) → $P = MC = \min ATC$
• Efficiency: $P = MC$ → allocative, $\min ATC$ → productive; PC in LR has both, but efficiency ≠ equity

Concepts

• PC Decision Map ← start here
• Market Structure
• Market Power
• Perfect Competition
• Profit Maximization
• Shutdown Rule
• Supply Curve
• Short-run and Long-run Equilibrium
• Allocative vs Productive Efficiency
• Sunk Cost
• Economic Profit