Perfect Competition
A QUICK REVIEW (AND EXAMPLE) OF PERFECT COMPETITION
Perfectly competitive firms are so small they don't have any market power (power to set price). Instead, these little firms respond as best they can to market conditions, trying to make a profit with the price that prevails in the market. Of course, the price is established by demand and supply in the industry as a whole, but no individual producer has an ability to move this price up or down.
Imagine that we have a market demand function given by P = 1010 .08Q, where P is the market price in the industry and Q is the total output of the good by producers in this particular industry. The demand curve is downward sloping, because consumers are willing to consume more of this good at lower prices but less of this good at higher prices (income and substitution effects).
Let's say that the total cost function faced by all firms is TC = 10,000 + 10q + q2 (they all have access to best-practice technology which......
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