Working with the firm's cost function enables us to learn how much of each input the firm should optimally use to produce a given level of output. However, the firm still has to decide how much output it should produce. This decision depends on the type of market the firm is operating in. We begin by analyzing the most common type of market: perfect competition.
Firms, like auto racers, operate in a competitive environment. This image is a work of the US Federal Government and in the public domain. Source: Wikipedia.
Keywords: Perfect competition; search theory; residual demand; cost measurement; profit maximization.
Read the recitation notes, which cover new content that adds to and supplements the material covered in lecture.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
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- Introduction to Perfect Competition (00:09:17)
Introduction to Perfect Competition
- Search Theory (00:04:35)
- Firm Demand vs. Market Demand (00:05:27)
Firm Demand vs. Market Demand
- Measuring Costs in Profit Maximization (00:07:04)
Measuring Costs in Profit Maximization
- Short Run Profit Maximization in a Competitive Market (00:13:21)
Short Run Profit Maximization in a Competitive Market
- Short Run Profit Maximization with Taxation (00:05:26)
Short Run Profit Maximization with Taxation
- Short Run Shutdown Decisions (00:03:43)
Short Run Shutdown Decisions
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
These optional resources are provided for students that wish to explore this topic more fully.
See the [Perloff] companion website for an overview of the main topics covered in the chapter, as well as quizzes, applications, and other related resources.
Learn more about Nobel Laureate Peter Diamond:
"Peter A. Diamond - Biographical." Nobelprize.org.