Goldwasser
AP Microeconomics
Name _______________
Module 21- Introduction to Perfect Competition
Before You Read the Module:
Summary
This module presents the model of perfect competition and uses it to analyze firms in the market.
Module Objectives
Review these objectives before you read the module. Place a “y” on the line when you understand
each of the following:
___ Objective 1. How a price-taking producer determines its profit-maximizing quantity of output
___ Objective 2. How to assess whether or not a competitive producer is profitable
While You Read the Module
Key Terms
Define these key terms as you read the module.
Price-taking firm's optimal output rule
List questions or difficulties from your initial reading of the module.
While You Read the MODULE
Fill-in-the-Blanks
Fill in the table completing the following statements. Terms may be used more than once. If you find
yourself having difficulties) please refer to the reading.
(1)
(4)
(2)
(5)
(3)
(6)
•
The price-taking firm's optimal output rule says that a price-taking firm's profit is maximized by
producing the quantity of output at which the market price is equal to the (1) ______ of the last
unit produced. In the case of a price-taking firm, (2) ______ is equal to the market price.
•
Accounting profit is calculated using only (3) ______ costs of the firm. Economic profit also
considers (4) ______ costs. Whether or not a firm earns a profit or a loss depends on whether
the market price is above or below the firm's (5) ______ cost. When a firm's total revenue is
(6) ______ its total cost, the firm is earning a profit.
Module Review
What If Marginal Revenue and Marginal Cost Aren't Exactly Equal?
The optimal output rule says that to maximize profit, you should produce the quantity at which
marginal revenue is equal to marginal cost. But what do you do if there is no output level at which
marginal revenue equals marginal cost? In that case, you produce the largest quantity for which
marginal revenue exceeds marginal cost. This is the case in Table 22-1 at an output of 5 bushels.
The simpler version of the optimal output rule applies when production involves large numbers,
such as hundreds or thousands of units. In such cases marginal cost comes in small increments, and
there is always a level of output at which marginal cost almost exactly equals marginal revenue.
•
A perfectly competitive industry is an industry in which both the producers and consumers in
that industry are price takers. A price-taking producer is one whose actions cannot affect the
market price of the good sold. A price-taking producer can sell as many units of the good as it
would like at the prevailing market price. A price-taking consumer is a consumer who cannot
influence the market price of the good by his or her actions. The market price is therefore
unaffected by the actions of either individual producers or individual consumers.
•
For an industry to be perfectly competitive, there must be many producers in that industry, and
no single producer can have a large market share. The product sold in a perfectly competitive
industry is a standardized product or commodity, and consumers must view each producer's
product as a perfect substitute for any other producer's product. Most perfectly competitive
industries also have easy entry of new firms into the industry and exit of existing firms from the
industry in the long run. This is referred to as free entry and exit.