ch11 - Perfect Competition Competition Perfect competition...

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Chapter 11 Perfect Competition Competition Perfect competition is an industry in which: o Many firms sell identical products to many buyers. o There are no restrictions on entry into the industry. o Established firms have no advantage over new ones. o Sellers and buyers are well informed about prices. 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. Examples of firms in perfect competition: o Wheat farms o Fisheries o Wood pulping o Laundry services o Painting A firm’s goal is to maximize economic profit, which is equal to total revenue minus total cost. Total revenue equals the price of output multiplied by the number of units of output sold. Marginal revenue is the change in total revenue that results from a one-unit increase in the quantity sold. The Firm’s Decisions in Perfect Competition In the short run, a firm must decide: o Whether to produce or to shut down. o If the decision is to produce, what quantity to produce. In the long run, a firm must decide: o Whether to increase or decrease its plant size. o Whether to stay in an industry or leave it. A perfectly competitive firm maximizes economic profit by choosing its output level. Economic profit is maximized when the total revenue curve exceeds the total cost curve by the largest amount. Another way to find the profit-maximizing output is to use marginal analysis and compare marginal revenue with marginal cost.
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Figure 11.3 shows Cindy’s profit-maximizing output using marginal analysis. If marginal revenue exceeds marginal cost, then the extra revenue from selling one more unit exceeds the extra cost incurred to produce it. The firm makes an economic profit on the marginal unit, so its economic profit increases if output increases.
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This note was uploaded on 06/30/2009 for the course ECON 1020 taught by Professor Parkin during the Spring '09 term at UWO.

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ch11 - Perfect Competition Competition Perfect competition...

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