Econ103part06 - Part 6 Perfect Competition Many markets are...

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Part 6 Perfect Competition Many markets are characterized by competitive conditions Theory of competitive markets is based on a model of “perfect competition” – an idealized competitive market - Many buyers and sellers - Identical outputs - Free entry and exit - Complete information
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The Firm Under Perfect Competition Firm must be small relative to the size of the market (minimum efficient scale must be small relative to the market) Individual firms cannot affect the market price (price taker) Price is set in the market as a whole, the individual firm adjusts output so as to maximize profit g iven the market price
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The Firm’s Total Revenue and Marginal Revenue Curves As the market price is given, the firm’s total revenue is its output times the market price (P x Q) The TR function will be a straight line from the origin The firm’s marginal revenue is MR = ΔTR/ΔQ As all units of output sell for the same price MR = P
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The Firm’s TR and MR Curves Q TR 100 125 TR P = $1.25 Q MR 1.25 MR = P
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Profit Maximization The firm has to decide whether to produce at all, and if so what output to produce The firm will produce in the short run so long as its variable costs can be covered Assuming the firm produces at all, the profit maximizing output is where there is the maximum excess of TR over TC or where MR = MC
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Profit Maximum: TR and TC TC TR Q’ Q” Economic Profit $ Q Q Profit Loss 0 Q’ Q” Q* Profit/Loss Profit Max
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and MC Q $ MR P MC Q* Why does MC = MR imply profit max? What would happen to TR and TC if output
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This note was uploaded on 01/28/2011 for the course ECON 103 taught by Professor Rutherford during the Winter '10 term at University of Victoria.

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Econ103part06 - Part 6 Perfect Competition Many markets are...

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