Chapter 10 - The Firm and the industry under perfect competition

Chapter 10 - The Firm and the industry under perfect competition

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Unformatted text preview: Chapter 10 The Firm and the Industry under Perfect Competition Competition . . . brings about the only . . . arrangement of social production which is possible. . . [Otherwise] what guarantee [do] we have that the necessary quantity and not more of each product will be produced, that we shall not go hungry in regard to corn and meat while we are choked in beet sugar and drowned in potato spirit, that we shall not lack trousers to cover our nakedness while buttons flood us in millions? FRIEDRICH ENGELS Perfect Competition Defined Perfect competition Numerous small firms & consumers Homogeneity of product Freedom of entry and exit Perfect information 2 The Perfectly Competitive Firm Perfectly competitive firm No choice Accept market price Price taker Horizontal demand curve Sell as much as it wants At market price Price Industry supply Industry demand 3 Demand curve for a firm under perfect competition Figure 1 4 1 2 3 4 Truckloads of Corn Sold by Farmer Jasmine per Year (a) Price per Bushel in Chicago 100 200 300 400 Total Sales in Chicago in Thousands of Truckloads per Year (b) S S D D Industry demand curve Industry supply curve $3 $3 C E B A Firms demand curve The Perfectly Competitive Firm Short-run equilibrium Choose quantity Marginal cost = Marginal revenue Firms demand - horizontal Price (P) Average revenue (AR) Marginal revenue (MR) P = AR = MR 5 Short-run equilibrium of the perfectly competitive firm Figure 2 6 Bushels of Corn per Year $3.00 2.25 1.50 Revenue and Cost per Bushels D=MR=AR AC MC 50,000 B A Revenues, costs, and profits of a perfectly...
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Chapter 10 - The Firm and the industry under perfect competition

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