9781118041581

In the longer term, much will depend on (1) technological innovations that enable

the extraction of greater output from limited resources, (2) success in finding substitutes

for today’s most important scarce resources, and (3) better management and conserva-

tion. No doubt some combination of alternative fuels, wind, solar, and nuclear power will

take the place of oil and coal in global energy supplies. A greater concern is the increas-

ing scarcity of water (often wasted because it is priced much too low) and arable land and

the long-term risks posed by global warming. Thus, the resource debate continues.

310 Chapter 7 Perfect Competition

SUMMARY

Decision-Making Principles

1. Whatever the market environment, the firm maximizes profit by
   establishing a level of output such that marginal revenue equals
   marginal cost.


2. In perfect competition, the firm faces infinitely elastic demand: Marginal
   revenue equals the market price. Thus, the firm follows the optimal
   output rule P MC. In long-run equilibrium, the firm’s output is
   marked by the equalities P MR MC ACmin, and the firm earns
   zero profit.


3. Economic transactions are voluntary. Buyers and sellers participate in
   them if and only if the transactions are mutually beneficial.


4. Competitive markets provide the efficient amounts of goods and services
   at minimum cost to the consumers who are most willing (and able) to
   pay for them. Worldwide competition and free trade promote global
   efficiency.

Nuts and Bolts

1. In a perfectly competitive market, a large number of firms sell identical
   products, and there are no barriers to entry by new suppliers. Price
   tends toward a level where the market demand curve intersects the
   market supply curve. In the long run, price coincides with minimum
   average cost, and all firms earn zero economic profits.


2. The total value associated with an economic transaction is the sum of
   consumer and producer surplus. Consumer surplus is the difference
   between what the individual is willing to pay and what she or he
   actually pays.


3. For any market, the height of the demand curve shows the monetary
   value that consumers are willing to pay for each unit. Consumer surplus

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