Competitive Market

Competitive Market - Firms in competitive markets Chapter...

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Firms in competitive markets Chapter 14
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Characteristics Competitive Market homogenous (identical) products low barriers to entry (free entry and exit from the industry) Each buyer and seller is a price taker
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Demand curve for a Price taker Demand curve for a Price maker
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Demand curve for Individual firm under Competitive Market P = AR = MR Firm’s D curve Market D curve
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Revenue Concepts Total revenue (TR) : Total number of dollars (or dong) received by a firm from the sale of a product. TR = P x Q Average revenue (AR) : Total revenue per unit of a product sold AR = TR/Q = (P x Q) / Q = P Marginal Revenue (MR) : Additional revenue received resulting from the sale of an extra unit of output MR = = = P ΔTR ΔQ P. ΔQ  ΔQ
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$131 $131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 $ 0 $ 0 131 131 262 262 393 393 524 524 655 655 786 786 917 917 1048 1048 1179 1179 1310 1310 ] $131 $131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 131 ] ] ] ] ] ] ] ] ] Product Product Price Price (Average (Average Revenue) Revenue) Total Total Revenue Revenue Marginal Marginal Revenue Revenue Quantity Quantity Demanded Demanded (Sold) (Sold)
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TR Price, average and marginal revenue, total revenue (dollars) P P Quantity demanded (sold) 1 2 3 4 5 6 7 8 9 10 917 917 786 786 655 655 524 524 393 393 262 262 131 131 0 D = MR P = AR = MR
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Profit Maximisation in the Short Run Two approaches to profit maximisation : Total Revenue minus Total Cost Approach Marginal Revenue, Marginal Cost Approach
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IMPORTANT! Rules for Profit Maximisation Optimum output where: TR – TC = greatest or Optimum output where: MR = MC or MR closest to MC but MR > MC MC cuts MR curve from below
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O O S D (a) (a) Industry Industry P $ Q (millions) P e (b) (b) Firm Firm AR D = AR = MR MC Q e Short-run equilibrium of industry and firm under Competitive Market Q (thousands)
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Total Revenue – Total Cost Approach (Price = $131) 0 1 2 3 4 5 6 7 8 9 10 Total
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Competitive Market - Firms in competitive markets Chapter...

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