Competition in the Short Run: There are number of very important concepts and results in this section.  A careful, graphical derivation of the model and its key results will prove very valuable in both the rest of this chapter and in the chapters to follow.

 

The starting point of the discussion is critical.  The assumptions of the perfectly competitive model, taken together, suggest price-taking behavior on the part of the firm.  The price that firms take as given is the market price as determined by the supply and demand interactions at the overall market level.  The most important part of this discussion is that because the firm is a price taker marginal revenue is simply equal to the market price.  It is important to make sure students understand the significance of this observation, since it will not be true in most other markets.

 

The second step, once students are clear on the P = MR relationship in this case, is to point out that for a perfectly competitive firm (and for any firm for that matter), profit is maximized where MR = MC (see Chapter 7).  In this particular scenario, this is equivalent to the condition that P = MC.  Solving this simple equation or using this fact in a diagram identifies the optimal amount of output for the firm to produce.

 

Finally, once the optimal output is calculated or found, this value is used to calculate the amount of profit (or loss) for the firm by comparing price and average cost at the optimal quantity.