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PERFECT COMPETITION AND EFFICIENCY: Perfect competition is the idealized market structure that achieves an efficient allocation of resources. The conditions of perfect competition, including (1) large number of small firms, (2) identical products sold by all firms, (3) freedom of entry into and exit out of the industry, and (4) perfect knowledge of prices and technology, ensure that perfect competition efficiently allocates resources. This is in fact the purpose of perfect competition: a market structure that illustrates perfection, the best of all possible resource allocation worlds. The real world falls short of this perfection.

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Lesson 23: Factor Market Equilibrium | Unit 3: Perfect Competition Page: 13 of 24

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  • This diagram sets the stage for analyzing the labor employment decision by a given firm, assuming perfect competition holds.

  • The critical question facing the firm is: How many workers should it hire?

  • The profit-maximizing decision by the firm is to hire 50 workers at the $10 wage.

    • Should the firm hire more workers, profit declines.
    • Should the firm hire fewer workers, profit declines.

  • The critical conclusion from this analysis is that a firm in a perfect competition factor market employs a factor such that marginal revenue product (MRP) is equal to marginal factor cost (MFC).

  • However, because this marginal factor cost (MFC) is equal to the factor price (W) for perfection competition, we have the secondary result that:

  • MRP = W
  • This is THE condition for efficiency in a factor market.


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MARKET CLEARING

A condition of the market in which the quantity demanded is equal to the quantity supplied, such that the market is "clear" of any shortage or surplus. Market clearing is a common, non-technical term for equilibrium. In a market graph, the market clearing is found at the intersection of the demand curve and the supply curve.

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Today, you are likely to spend a great deal of time touring the new suburban shopping complex looking to buy either a package of 3 by 5 index cards, the ones without lines or a blue mechanical pencil. Be on the lookout for slightly overweight pizza delivery guys.
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During the American Revolution, the price of corn rose 10,000 percent, the price of wheat 14,000 percent, the price of flour 15,000 percent, and the price of beef 33,000 percent.
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