Mastering Profit Maximization in Perfect Competition

1. AP Economics Mr. Bernstein Module 58: Introduction to Perfect Competition November 5, 2013

2. AP EconomicsMr. Bernstein Perfect Competition • Of the four market structures, this is the only one where the firm is a price-taker – they have no control over price • The price is set in the market and the firm decides on their optimal level of production

3. AP EconomicsMr. Bernstein Profit Maximization in Perfect Competition • Optimal Output Rule: MR = MC • In this structure, P = MR • And MR = AR • Profit Maximization is where P = MC

4. AP EconomicsMr. Bernstein Profit Maximization in Perfect Competition • Optimal Output Rule: MR = MC • In this structure, P = MR • And MR = AR • Profit Maximization is where P = MC • Because the firm cannot raise or lower their price, the horizontal line P = MR = AR also serves as the demand curve (a perfectly elastic one…) • Again, Profit Maximization is where P = MC

5. AP EconomicsMr. Bernstein Profit Maximization in Perfect Competition

6. AP EconomicsMr. Bernstein Calculating Profits • Total Profits • P = TR – TC • If TR > TC, profits are positive • If TR < TC, profits are negative • Profit Per Unit • If P > AC, profits per unit are positive • If P < AC, profits per unit are negative