ENDURING UNDERSTANDING

PRD-3
Even with a common goal of profit-maximization, market structure constrains and influences prices, output, and efficiency.

LEARNING OBJECTIVE ESSENTIAL KNOWLEDGE
  • PRD-3.A
    a. Define (using graphs as appropriate) the characteristics of perfectly competitive markets and efficiency.
    b. Explain (using graphs where appropriate) equilibrium and firm decision making in perfectly competitive markets and how prices in perfectly competitive markets lead to efficient outcomes.
    c. Calculate (using data from a graph or table as appropriate) economic profit (loss) in perfectly competitive markets.
ESSENTIAL KNOWLEDGE
  • PRD-3.A.1
    A perfectly competitive market is efficient. Firms in perfectly competitive markets face no barriers to entry and have no market power.
  • PRD-3.A.2
    In perfectly competitive markets, prices communicate to consumers and producers the magnitude of others’ marginal costs of production and marginal benefits of consumption and provide incentives to act on that information (i.e., price equals marginal cost in an efficient market).
  • PRD-3.A.3
    In perfectly competitive markets, firms can sell all their outputs at a constant price determined by the market.
  • PRD-3.A.4
    At a competitive market equilibrium, firms are price takers and select output to maximize profit by producing the level of output where the marginal cost equals marginal revenue (at the price).
  • PRD-3.A.5
    At a competitive market equilibrium, the price of a product equals both the private marginal benefit received by the last unit consumed and the private marginal cost incurred to produce the last unit, thus achieving allocative efficiency.
  • PRD-3.A.6
    In a short-run competitive equilibrium, price can either be above or below its long-run competitive level resulting in profits or losses, motivating entry or exit of firms and moving prices and quantities toward long-run equilibrium.
  • PRD-3.A.7
    In a long-run perfectly competitive equilibrium, productive efficiency implies all operating firms produce at efficient scale, price equals marginal cost and minimum average total cost, and firms earn zero economic profit.
  • PRD-3.A.8
    Firms may be in a constant cost, increasing cost, or decreasing cost industry. Long-run prices depend on the portion of the long-run cost curves on which firms operate.
  • PRD-3.A.9
    A perfectly competitive market in long-run equilibrium is allocatively and productively efficient.