Chapter 12 \u2013 Microeconomics - Chapter 12 Firms in Perfectly Competitive Markets 12.1 1 2 3 This chapter examines perfect competition a market

Chapter 12 u2013 Microeconomics - Chapter 12 Firms in...

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Chapter 12 – Firms in Perfectly Competitive Markets12.1This chapter examines perfect competition, a market structure characterized by1many buyers and sellers,2identical (homogeneous) products, and3easy market entry and exit.In a perfectly competitive market, there are many buyers and sellers, perhaps thousands or conceivably millions. oBecause each firm is so small in relation to the industry, its production decisions have no impact on the market—each regards price as something over which it has no control.Consumers believe that all firms in perfectly competitive markets sell identical (or homogeneous) products.Product markets characterized by perfect competition have no significant barriers to entry or exit.oIf buyers can easily switch from one seller to another and sellers can easily enter or exit the industry, then they have met the perfectly competitive condition of easy entry and exit.12.2In perfectly competitive markets, buyers and sellers must accept the price that the market determines, so they are said to be price takers.In a perfectly competitive market, individual sellers can change their outputs, and it will not alter the market price.oThe large number of sellers who are selling identical products make this situation possible. oEach producer provides such a small fraction of the total supply that a change in the amount he offers does nothave a noticeableeffect on market equilibrium price. oIn a perfectly competitive market, then, an individual firm can sell as much as it wishes to place on the market at the prevailing price; the demand, as seen by the seller, is perfectly elastic.In effect, sellers are provided with current information about market demand and supply conditions as a result of price changes. oIt is an essential aspect of the perfectly competitive model that sellers respond to the signals provided by such price movements,so they must alter their behavior over time in light of actual experience, revising their production decisions to reflect changesin market price.12.3The objective of the firm is to maximize profits. To maximize profits, the firm wants to produce the amount that maximizes the difference between its total revenues and total costs.
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Total revenue (TR)is the revenue that the firm receives from the saleof its products. Total revenue from a product equals the price of the good (P) times the quantity (q) of units sold (TR = P * q)Average revenue (AR)equals total revenue divided by the number of units of the product sold (TR÷ q, or [P× q] ÷ q).Marginal revenue (MR)is the additional revenue derived from the production of one more unit of the good. In other words, marginal revenue represents the increase in total revenue that results from the sale of one more unit(MR = {change}TR / {change}q)In all types of market environments, the firm will maximize its profits atthe output that maximizes the difference between total revenue and total cost, which is at the same output level at which marginal revenueequals marginal cost.
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