LS 11 - CHAPTER 11 Perfect Competition What Is Perfect...

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Perfect Competition CHAPTER 11 What Is Perfect Competition? Perfect competition is an industry in which ± Many firms sell identical products to many buyers. ± There are no restrictions to entry into the industry. ± Established firms have no advantages over new ones. ± Sellers and buyers are well informed about prices. What Is Perfect Competition? How Perfect Competition Arises Perfect competition arises: ± When firm’s minimum efficient scale is small relative to market demand so there is room for many firms in the industry. ± And when each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm they buy from.
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What Is Perfect Competition? Price Takers 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. No single firm can influence the price—it must “take” the equilibrium market price. Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic . What Is Perfect Competition? Economic Profit and Revenue The goal of each firm is to maximize economic profit , which equals total revenue minus total cost . Total cost is the opportunity cost of production, which includes normal profit . A firm’s total revenue equals price, P , multiplied by quantity sold, Q , or P × Q . A firm’s marginal revenue is the change in total revenue that results from a one-unit increase in the quantity sold. What Is Perfect Competition? Figure 11.1 illustrates a firm’s revenue concepts. Part (a) shows that market demand and market supply determine the market price that the firm must take.
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What Is Perfect Competition? Figure 11.1(b) shows the firm’s total revenue curve ( TR )— the relationship between total revenue and quantity sold. What Is Perfect Competition? Figure 11.1(c) shows the marginal revenue curve ( MR ). The firm can sell any quantity it chooses at the market price, so marginal revenue equals price and the demand curve for the firm’s product is horizontal at the market price. What Is Perfect Competition? The demand for the firm’s product is perfectly elastic because one of Cindy’s sweaters is a perfect substitute for the sweater of another firm. The market demand is not perfectly elastic because a sweater is a substitute for some other good.
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The Firm’s Decisions in Perfect Competition A perfectly competitive firm faces two constraints: 1. A market constraint summarized by the market price and the firm’s revenue curves. 2. A technology constraint summarized by firm’s product curves and cost curves (like those in Chapter 10). The goal of the firm is to make maximum economic profit, given the constraints it faces.
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This note was uploaded on 11/23/2011 for the course ECON 202 taught by Professor Brightwell during the Fall '08 term at Texas A&M.

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LS 11 - CHAPTER 11 Perfect Competition What Is Perfect...

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