ch9 - Chapter 9 Competitive markets Perfect competition...

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Unformatted text preview: Chapter 9 Competitive markets Perfect competition Basic assumptions 1. Homogeneous (i.e. identical) products. 2. Buyers know prices charged by each firm. 3. MES is small relative to market size. 4. Freedom of entry and exit in long-run. Results : Assumptions 1-3 imply that each firm acts as price-taker which implies that they have no influence on price face a horizontal demand curve even though market demand is downward sloping. Draw the firm demand curve which corresponds to the demand and supply diagram P q P Q S D Firm Industry EC120 Chapter 9 Competitive markets page 1 of 12 Marginal and Average revenue Total revenue (TR) = P Q Average revenue (AR) = TR/Q is the revenue earned from the typical unit if all units sell at the same price then AR = P. Marginal revenue (MR) = TR/ Q is the added revenue from each additional unit if demand is horizontal then MR = P. Draw the firms MR, AR and TR curve which correspond to the firms demand curve P q TR q D f EC120 Chapter 9 Competitive markets page 2 of 12 Profit maximization for competitive firms A competitive firm maximizes profits by producing where MR (= P) = MC provided MR < MC for subsequent units P AVC (i.e. TR (i....
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This note was uploaded on 11/17/2008 for the course EC 120 taught by Professor Zeiss during the Spring '08 term at Wilfred Laurier University .

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ch9 - Chapter 9 Competitive markets Perfect competition...

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