Microeconomics-chapter 12.pptx - Microeconomics ELEVENTH EDITION Michael Parkin Chapter 12 Perfect Competition What is Perfect Competition Perfect

Microeconomics-chapter 12.pptx - Microeconomics ELEVENTH...

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Microeconomics ELEVENTH EDITION Michael Parkin Chapter 12 Perfect Competition
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What is Perfect Competition? Perfect competition is a market 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: the firm’s minimum efficient scale is small relative to market demand so there is room for many firms in the market. each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm’s good they buy.
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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 A firm’s goal is to maximize economic profit . A firm’s total revenue equals the price of its output multiplied by the number of units of output sold (price × quantity). 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? Demand, Price, and Revenue in Perfect Competition In part (a), market demand and market supply determine the market price (and quantity). Part (b) shows the firm’s total revenue. Part (c) shows the firm’s marginal revenue. This curve is also demand curve for the firm’s sweaters (perfectly elastic demand).
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What is Perfect Competition? Marginal revenue Because the firm in perfect competition is a price taker, the change in total revenue that results from a one-unit increase in the quantity sold equals the market price. In Perfect Competition, the firm’s marginal revenue equals the market price.
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What is Perfect Competition? Demand for the firm’s product The firm can sell any quantity at the market price. So the demand curve for the firm’s product is a horizontal line , the same as the firm’s marginal revenue . A horizontal demand curve illustrates a perfectly elastic demand . A good from one factory is a perfect substitute for the same the same good from any other factory. But the market demand for that good is not perfectly elastic , because its elasticity depends on the substitutability of that good for other goods and services.
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What is Perfect Competition?
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