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October 19, 2021 

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LONG-RUN ADJUSTMENT, PERFECT COMPETITION: The combined adjustment of a perfectly competitive industry and of each firm in the industry to an equilibrium condition that eliminates all economic profits and losses, while each firm selects a factor size that maximizes profit. This adjustment process involves two parts. One is the adjustment of each perfectly competitive firm to the appropriate factory size that maximizes long-run profit. The other is the entry of firms into the industry or exit of firms out of the industry, to eliminated economic profits or economic losses. The end result of this long-run adjustment is a multi-faceted equilibrium condition: P = AR = MR = MC = LRMC = ATC = LRAC

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TOTAL FACTOR COST CURVE, PERFECT COMPETITION:

A curve that graphically represents the relation between total factor cost incurred by a perfectly competitive firm when using a given factor of production to produce a good or service. The total factor cost curve is most important in factor market analysis for the derivation of the marginal factor cost curve.
Perfect competition is a market structure with a large number of small participants (buyers and sellers). The good exchanged in the market is identical, regardless of who sells or who buys. Participants have perfect knowledge and perfect mobility into and out of the market. These conditions mean perfectly competitive buyers are price takers, they have no market control and must pay the going market price for all inputs bought.

The total factor cost curve reflects the degree of market control held by a firm. For a perfectly competitive firm with no market control hiring inputs under perfect competition, the total factor cost curve is a straight line that emerges from the origin. For firms with market control, including monopsony, oligopsony, or monopsonistic competition, the total factor cost curve increases at an increasing rate. The shape of the total factor cost curve thus indicates the degree of market control possessed by the factor buyer.

Total Factor Cost Curve,
Perfect Competition
Total Factor Cost Curve, Perfect Competition
Total factor cost is commonly represented by a total factor cost curve, such as the one displayed in the exhibit to the right. This particular total factor cost curve is that for labor hired by a hypothetical buyer, Maggie's Macrame Shoppe. Maggie's Macrame Shoppe is one of thousands of small retail stores in the greater Shady Valley metropolitan area that hires labor with identical skills. As such, Maggie pays the going wage for labor.

The vertical axis measures total factor cost and the horizontal axis measures the quantity of input (workers). Although quantity on this particular graph stops at 10 workers, the nature of perfect competition indicates it could go higher.

This curve indicates that if Maggie hires 1 worker, then she pays $10 of total factor cost. Alternatively, if she hires 10 workers, then she pays $100 of total factor cost. Should she hire 100 workers, then she would move well beyond the graph, with $1000 of total factor cost.

The "curve" is actually a "straight line" because Maggie is a price taker in the labor market. She pays $10 for each worker whether she hires 1 worker or 10 workers. The constant price is what makes Maggie's total factor cost curve a straight line, and which indicates that Maggie has no market control.

<= TOTAL FACTOR COST CURVE, MONOPSONYTOTAL FACTOR COST, MONOPSONY =>


Recommended Citation:

TOTAL FACTOR COST CURVE, PERFECT COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2021. [Accessed: October 19, 2021].


Check Out These Related Terms...

     | total factor cost | total factor cost curve | total factor cost curve, monopsony | average factor cost | marginal factor cost | average factor cost curve | marginal factor cost curve | total cost | total product | total factor cost, monopsony |


Or For A Little Background...

     | market structures | perfect competition | perfect competition characteristics | monopsony | oligopsony | monopsonistic competition | supply | supply price | law of supply | efficiency |


And For Further Study...

     | factor market analysis | short-run production analysis | marginal factor cost and average factor cost | factor supply | factor supply curve | supply by a firm | supply to a firm | mobility |


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