Ch-1. 14 Competitive Markets

Ch-1. 14 Competitive Markets - Chapter 14 Competitive...

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Competitive Markets Chapter 14
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What quantity will a firm choose to maximize profits? Will competitive markets lead to an efficient outcome?
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Characteristics of a Competitive Market Many buyers and sellers Goods offered by the various sellers are essentially the same Firms can freely enter or exit the market Buyers and sellers all have complete info about market price and product qualities
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Firms in perfect competition are price takers. A price taker is a firm that cannot influence the market price; trying to set a higher price leads to selling a quantity of zero, and there is no rational reason to set a lower price.
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A firm is a price taker if it faces a perfectly elastic demand for its product.
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$ Market Q D M S M $5 $5 Individual Firm q $ D F
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Marginal Revenue Marginal revenue is the change in total revenue from an additional unit sold. For firms in perfect competition , marginal revenue is equal to price.
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Q FC VC TC 0 35 0 35 1 35 24 59 2 35 40 75 3 35 60 95 4 35 85 120 5 35 115 150 6 35 155 190 7 35 210 240
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Q FC VC TC TR Profit 0 35 0 35 0 -35 1 35 24 59 40 -19 2 35 40 75 80 5 3 35 60 95 120 25 4 35 85 120 160 40 5 35 115 150 200 50 6 35 155 190 240 50 7 35 210 240 280 40 Note: Price = $40
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Marginal Cost Marginal cost is the increase in total cost that arises from an extra unit of output.
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FC VC TC TR Profit MC 0 35 0 35 0 -35 -- 1 35 24 59 40 -19 24 2 35 40 75 80 5 16 3 35 60 95
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Ch-1. 14 Competitive Markets - Chapter 14 Competitive...

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