ch 9_Econ 281_Fall_2010 - Chapter9: 1 OUTLINE 1 2 3 4 1...

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Chapter 9:  Perfectly Competitive Markets
Chapter 9:  Perfectly Competitive Markets

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1. Perfect Competitive markets
2. Profit Maximization
3. Supply curves
4. Long run and short run equilibrium
1. Producer surplus
OUTLINE

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consists of
firms that produce identical products that sell at the
same price.
Each firm’s volume of output is so small in
comparison to the overall market demand that no
single firm has an impact on the market price.
To get a more formally correct definition, read the beginning of
Ch. 9 on the textbook.
A perfectly competitive market

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The Law of One Price: There is a single
price at which transactions occur.
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Price Takers: Buyers and sellers take the
price of the product as given when making
their purchase and output decisions.
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Free Entry: Firm can freely access and
enter the market

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Consider a perfectly competitive market.
Now we find out
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What is the market price
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Which demand each firm is facing
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What is total revenue (TR)
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What is marginal revenue (MR)
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When a firm is better off shutting down
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The individual firm’s supply
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The market supply

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Price Taker of what price?
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Dave runs a small firm producing syrup.
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Assume that Syrup market is Perfectly Competitive
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Dave is Price taker.
Market demand and
Market supply
determine the price
at which each firm
can sell its output.
Hence Dave can sell
each syrup can at
$8

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Demand faced by each firm
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Dave’s production is so small with respect to the entire
market that he can produce as much as he wants and the
price on the market will not change
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He faces a perfectly elastic demand.

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Revenue Concepts
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In perfect competition, market demand and market
supply determine price.
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A firm’s total revenue equals the market price
multiplied by the quantity sold. TR=PQ
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A firm’s marginal revenue is the change in total
revenue that results from a one-unit increase in
the quantity sold .
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Dave is price taker: For each unit he sells he receives
the market price ($8). Hence the increase in revenue
for each extra can of syrup he sells is equal to the
market price of syrup ($8). So MR is equal to $8 for
each level of Dave’s sales.

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Total Revenue
For a price taker firm total
revenues (TR) are
TR(Q)=PQ
where the price P is the
market price.
Dave TR curve is
TR(Q)=8Q

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Dave’s marginal
revenue curve
coincides with the
demand curve he
faces
For a price taker firm total revenues MR=P
Where P is the market price

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FIRM’S PROBLEM
The problem of the price taking firm: Find the profit
maximizing output
Economic profit TR – TC
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Profit can be a negative value if TR(q)<TC(q). In this
case is a loss.