Perfect Competition

Market structures describe important features of the economic environment in which firms operate.  A firm’s decisions about how much to produce or what price to charge depend on the structure of the market.  Perfect competition is the most basic of market structures. 

When a perfect competition exists it means that an individual buyer or seller has no control over the price since price is determined by MARKET demand and supply.  Because supply and demand is the determinants of price, price is fixed and can be represented as a horizontal line.  (See figure 1).

Figure 1:

 

Now that you know what a perfect competition market structure is, is it important to know how firms in this market structure maximize profit in the short run.  All firms try to maximize economic profit, which is any profit above normal profit.  Subtracting TC from TR is one way to find the profit maximization output.  Another way to find the profit maximizing rate of output is to focus on MR and MC.  When MR=MC profit maximization occurs.

Here are three important short run maximization graphs:

 

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