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L9- Perfect competition-BB

L9- Perfect competition-BB - Introduction:AScenario You...

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Introduction:  A Scenario You plan to run your own business. You have to decide how much to produce, what price to charge, how many workers to hire, etc. What factors should affect these decisions? Your costs (studied in preceding chapter) How much competition you face We begin by studying the behavior of firms in perfectly competitive markets.
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Characteristics of Perfect Competition 1. Many buyers and many sellers 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. 1. Many buyers and many sellers 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. Because of 1 & 2, each buyer and seller is a price taker ” – takes the price as given.
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The Revenue of a Competitive Firm Total revenue ( TR ) Average revenue ( AR ) Marginal Revenue ( MR ) : The change in TR from selling one more unit. TR Q MR = TR = P x Q TR Q AR = = P
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Exercise Exercise Fill in the empty spaces of the table. 4 $50 $10 5 $40 $10 4 $10 3 $10 2 $10 $10 1 n.a. $10 0 TR P Q MR AR $10
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Answers Answers Fill in the empty spaces of the table. 5 $50 $10 5 $40 $10 4 $10 3 $10 $10 $10 $10 $10 2 $10 $10 1 n.a. $30 $20 $10 $0 $10 0 TR = P x Q P Q TR Q MR = TR Q AR = $10 $10 $10 $10 $10 Notice that MR = P Notice that MR = P
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MR  =  P   for a Competitive Firm A competitive firm can keep increasing its output without affecting the market price. So, each one-unit increase in Q causes revenue to rise by P , i.e. , MR = P . MR = P is only true for firms in competitive markets. MR = P is only true for firms in competitive markets.
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Profit Maximization What Q maximizes the firm’s profit? To find the answer, Think at the margin .” If increase Q by one unit, revenue rises by MR , cost rises by MC . If MR > MC , then increase Q to raise profit.
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