This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Chapter 11- Perfect Competition Competition as a process is a rivalry among firms and is prevalent throughout our economy. Competition as a perfectly competitive market structured Perfectly competitive market is a market in which economic forces operate unimpeded. 1.both buyers and sellers are price takers-firm or individual who takes the price determined by market supply and demand as given. 2. the number of firms is large 3. there are no barriers to entry-no social, political or economic impediments that prevent firms from entering a market.-without, firms could make a profit by raising price, hence, their demand curve would not be perfectly elastic and hence, perfect competition would not exist. 4. firms products are identical 5. there is complete information 6. selling firms are profit-maximizing entrepreneurial firms Conditions are needed to ensure that economic forces operate instantaneously and are unimpeded by political and social forces. Even though the demand curve for the market is downward sloping, the perceived demand curve of an individual firm is perfectly elastic because each firm is so small relative to the market. Difference in perception means that firms will increase their output in response to an increase in market demand even though that increase in output will cause prices to fall and can make all firms collectively worse off. But since, by perfect competition, they dont act collectively, they each follow their own self-interest. Competitive firm is such a small portion of the total market that it can have no effect on price. Consequently it takes the price as given, and hence, its perceived demand curve is perfectly elastic. Profit-maximizing level of output== MC=MR-what happens to profit in response to a change in output is determined by Marginal revenue (MR)- the change in total revenue associated with a change in quantity. Marginal cost (MC)- change in total cost associated with a change in quantity. Marginal revenue- since perfect competitor accepts the market price as give, marginal revenue is simply the market price. -for a competitive firm, MR=P-for a perfect competitor, the marginal revenue curve and demand curve it faces are the same Marginal cost- change in total cost that accompanies a change in output. Best defined between numbers Profit maximization: MC=MR If marginal revenue doesnt equal marginal cost, a firm can increase profit by changing output. Because the marginal cost curve tells us how much of a produced good a firm will supply at a given price, the marginal cost curve is the firms supply curve. The MC curve tells the competitive firm how much it should produce at a given price....
View Full Document