Perfect Competition as a Polar Case of Imperfect Competition

Although we.have applied the MC and MR rule to monopolists who desire to maximize profits, this rule is actually applicable far beyond the preselt analysis. A little thought shows that the MC = MR rule applies with equal validity to a profit-maximizing perfect competitor. We can see this .in two steps: I. MRfor a perftct competitor.The first question is.What isMR for a perfect competitor? For a perfect competitor. the sale of extra units will never depress price. and the “lost revenue on all previous q” is .
therefore equal to zero. Price and marginal revenue are identical for perfect competitors. Under perfect competition. price equals average revenue equals marginal revenue (P= MR = AR).

A perfect competitor’s dd curve and its MR curve coincide as horizontal lines. 2. MR = P = MefM a perftct competitor. In addition. we can see that the logic of profit maximization for monopolists applies equally well to perfect competitors. but the result is a little different. Economic logic shows that profits are maximized at that-output level where Me equals AfR. But by step 1 above. for a perfect competitor. MR equals P. Therefore. the MR = MC profit-maximization condition becomes the special case of P = MC that we derived in the last chapter for a perfect competitor:

Because a perfect competitor can sell all it wants at the market price. AIR = P= ,WC at the. maximum-profit level of output. You can see this result visually by redrawing Figure 9-4(a). If the graph applied to a perfect competitor. the DD curve would be horizontal atthe market price. and it would coincide with the MR curve. The profit-maximizing MR = MC intersection would also come at P = Me. We see then how the general rule for profit maximization applies to perfect as well as imperfect competitors,

[av_button label='Get Any Economics Assignment Solved for US$ 55' link='manually,' link_target='' color='red' custom_bg='#444444' custom_font='#ffffff' size='large' position='center' icon_select='yes' icon='ue859' font='entypo-fontello']

Share This