Ch11 - CHAPTER 1 1 Perfect Competition After studying this...

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Perfect Competition CHAPTER 11
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After studying this chapter you will be able to Define perfect competition Explain how firms make their supply decisions and why they sometimes shut down temporarily and lay off workers Explain how price and output in an industry are determined and why firms enter and leave the industry Predict the effects of a change in demand and of a technological advance Explain why perfect competition is efficient
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The Busy Bee The busy bee pollinates plants and beekeepers rent their hives to farmers. Across the United States from Vermont to California, a parasite is killing off bees and the rent farmers pay for hives has more than doubled. How does competition in beekeeping and other industries affect prices and profits? We study a fiercely competitive market in this chapter. We explain the changes in price and output as the firms in perfect competition respond to changes in demand and technological advances.
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What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have no advantages over new ones. Sellers and buyers are well informed about prices.
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What Is Perfect Competition? How Perfect Competition Arises Perfect competition arises: When firm’s minimum efficient scale is small relative to market demand so there is room for many firms in the industry. And when each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm they buy from.
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What Is Perfect Competition? Price Takers In perfect competition, each firm is a price taker. A price taker is a firm that cannot influence the price of a good or service. No single firm can influence the price—it must “take” the equilibrium market price. Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic .
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What Is Perfect Competition? Economic Profit and Revenue The goal of each firm is to maximize economic profit , which equals total revenue minus total cost . Total cost is the opportunity cost of production, which includes normal profit . A firm’s total revenue equals price, P , multiplied by quantity sold, Q , or P × Q . A firm’s marginal revenue is the change in total revenue that results from a one-unit increase in the quantity sold.
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What Is Perfect Competition? Figure 11.1 illustrates a firm’s revenue concepts. Part (a) shows that market demand and market supply determine the market price that the firm must take.
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What Is Perfect Competition? Figure 11.1(b) shows the firm’s total revenue curve ( TR )—the relationship between total revenue and quantity sold.
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What Is Perfect Competition? Figure 11.1(c) shows the marginal revenue curve (
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This note was uploaded on 04/29/2009 for the course ECON 103 taught by Professor Holt during the Spring '08 term at George Mason.

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Ch11 - CHAPTER 1 1 Perfect Competition After studying this...

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