Chapter 9

Chapter 9 - Chapter 9 Market Structure particular...

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Chapter 9 Market Structure – particular environment of a firm, the characteristics of which influence the firm’s pricing and output decisions. Perfect Competition – theory of market structure based on 4 assumptions: o Many sellers/many buyers – none of which is large in relation to total sales of purchases o Firm produces and sells homogenous product o Buyers & sellers have all relevant info about prices, product, quality, source of supply, and so forth. o Easy entry and exit Price taker – takes price determined by market Perfectly competitive firm faces a horizontal demand curve at the equilibrium price. Marginal Revenue (MR) – change in total revenue that results from selling one additional unit of output o MR = ∆TR / ∆Q Perfectly competitive firm → P = MR Marginal revenue curve = demand curve Firm will continue to increase its quantity of output as long as marginal revenue is greater than marginal cost Firm will stop increasing its quantity of output when marginal revenue and marginal cost are equal Profit maximization rule: profit is maximized by producing the quantity of output at which MR = MC Resource allocative efficiency – situation that exists when firms produce the quantity of output at which price = MC Perfectly competitive firm is resource allocative efficient
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Chapter 9 - Chapter 9 Market Structure particular...

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