A Quick Review (and Example) of Perfect Competition

Perfectly competitive firms are so small they donпїЅt 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 пїЅ .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).

LetпїЅs 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 affects these costs, and they are all able to hire workers and other inputs to produce goods and services. Therefore, every firm has the same costsпїЅ.no one has a special technological or cost advantage). In this