CHAPTER_12 - CHAPTER12:PERFECTCOMPETITION buyers 1 industry...

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CHAPTER 12: PERFECT COMPETITION 1. What is Perfect Competition? 2. How perfect competition arises 3. Price takers  4. Economic Profit and Revenue, TR,MR & AR  curves 5. The Firm’s Decision in Perfect Competition Short-run decision Long-run decision 6. Profit-Maximizing Output 7. Marginal Analysis 8. Profits and Losses in the Short Run Three possible profit outcomes 9. The Firm’s Short-Run Supply Curve 10. Short-Run Industry Supply Curve 11. Output, Price and Profit in Perfect Competition in  Short-Run 12. Output, Price and Profit in Perfect Competition in  Long-Run Changing Tastes Changing Technology 13. Competition and Efficiency 1.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. 2.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. 3.Price Takers In perfect competition, each firm is a price taker. 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. 4. 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.
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A   firm’s  total   revenue  equals   price,   P multiplied by quantity sold,  Q , which is  ×   Q . A firm’s marginal revenue is the change in total  revenue that results from a one unit increase in  the   quantity   sold.   Because   in   perfect  competition the price remains the same as the  quantity sold changes, marginal revenue equals  price. Figure 12.1 illustrates a firm’s revenue concepts. Part (a) shows that market demand and market supply determine the market price that the firm must take. The demand for a firm’s product is perfectly elastic because one firm’s sweater is a perfect substitute for the  sweater of another firm.
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