Right now we're going to talk about perfect competition. Because I know a few things

Because I know a few things about being perfect.

[Mumbles] stupid

Alright before jumping to perfect competition let's take a step back and

talk about the four market structures. Every product out there is produced in a market

that's one of these for market structures

there's perfect competition, monopolistic competition,

oligopoly and monopoly.

I'm going to explain perfect competition this video

but the other market structure: imperfect competition

is also super important.

A great example of a product that is produced in perfect competition is

oranges or strawberries or milk.

No, NO, Paul, I'm not drinking another gallon of milk!

You'll remember that firms inside perfect competition have several characteristics

the most important one is that their products are completely identical

as other firms, that means that they're perfect substitutes for each other.

Think about,

a dairy farmer can't taste milk and determine if that was his cow or some other

cow that produced that milk.

It's the same way with all other firms are in

perfect competition

another key characteristic is that there's many small firms and plenty of

people producing this product.

Now, if you put those together, you find out that these firms

are: price takers.

This means they have to take price that is set by the market.

So, they have no control over the price.

It'll make more sense if I show it to you in graphs.

What we have right here is the market for milk.

You learned this before, it's got demand and supply and it sets an

equilibrium at ten dollars.

so this is the industry graph, or the market graph, that includes all the different

firms that produce milk.

Right here is the graph for one individual firm

Since their price takers, the demand for this firm is horizontal it is perfectly elastic.

This is because they have no control over the

price

If they raise the price up, to 11, then no one is going to go to them, they will go to all the

other dairy farmers

and there's no reason for them to lower the price below 10, because people

are going to buy as many units they sell, at ten dollars

this horizontal demand curve is the demand, but is also equal to marginal revenue

The marginal revenue is the additional revenue the firm gets when they sell another unit.

So, if they sell another crate for ten dollars, their additional revenue is ten dollars

They sell another crate, for another ten dollars, additional revenue is ten dollars.

So, the demand equals the marginal revenue. It also equals the average revenue and the price.

And your teacher will tell you that this is sometimes called Mr. DARP. (MR=D=AR=P)

(Ehhhhhh)

That's something I do my classes anytime I say the word MR=D=AR=P

the students have to go: Ehhhhhhh

This is the horizontal demand curve which equals the marginal revenue curve.

Mr. DARP. (ehhhhhh)

The point is, the demand and the marginal revenue are horizontal for the firm.

Now, if we take some cost curves and put it on here,

we can actually figure out how many units this firm should produce

and we can calculate profits.

Let's zoom in on the fim. Notice, we have a marginal cost curve and an ATC.

The first question is to figure out how many units they should produce.

That brings up the most important concept in all of microeconomics:

Which is the profit maximizing rule. All firms should produce where

MR equals MC.

This is basically saying that you should always produce as long as the marginal revenue

is greater than the marginal cost.

At the point where the equal you should stop

producing and that is the profit maximizing quantity.

if you produce for the marginal cost is greater than marginal revenue, you make

less profit than before.

This firm is going to produce where MR hits MC, which is right there, at 10 units.

they don't wanna stop at four units because they can still produce more profit

And they don't want to produce eleven units because

the additional cost is greater than the additional revenue of selling that unit.

This is why you spent so much time learning about all the cost curves.

You put them together with the rescue curves and now you can figure out how many

units should a firm produce

what is their total revenue, their total cost and how much is profit

In this case, they're selling 10 units

for ten dollars each. That big box, right there, is total revenue.

Now, is that all profit?

No, because some of it is cost. To calculate the total cost, you have to find

the average total cost of each unit. Which is six dollars.

6 x 10 = 60 That box, in yellow, is the total cost.

Total revenue of 100, minus 60 total cost

gives you 40 dollars profit, green box

This individual firm is maximizing profit we're at MR = MC

and they're making economic profit of $40 or four dollars per unit.

This graph is a firm in a perfectly competitive industry.

and that's graph that you will have to draw

and analyze do well on your tests. Make sure you feel comfortable drawing

these side by side graphs; the market and the firm.

with the firm showing profit or showing a loss

or breaking-even in the long-run equilibrium. Another thing you should be able to

do other than just draw the graph is

use a chart to calculate how much profit is being made.

You will learn how to do that in the next video.

Hey, I hope this video helped you to understand perfect competition.

If you like these videos, make sure to subscribe. Check out the next video that will

explain the whole thing over again except using charts. Also, take a look at

my microeconomics review video that covers

all the concept of microeconomics. It'll get you ready for your final

or for your AP tests. Alright, 'till next time.