Sess 8 Perfect Competition - CHAPTER 12 Perfect Competition...

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Business Microeconomics Instructor: Gulnara Moldasheva 1 Perfect Competition CHAPTER 12
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Business Microeconomics Instructor: Gulnara Moldasheva 2
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Business Microeconomics Instructor: Gulnara Moldasheva 3 Airlines and automobile producers are facing tough times: Prices are being slashed to drive sales and profits are turning into losses. Workers have been laid off temporarily or let go permanently. What determines the firm s price and profit? Why do firms sometimes stop producing and temporarily lay off their workers? To study competitive markets, we are going to build a model of a market in which competition is as fierce and extreme as. We call this situation perfect competition.
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Business Microeconomics Instructor: Gulnara Moldasheva 4 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.
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Business Microeconomics Instructor: Gulnara Moldasheva 5 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. What Is Perfect Competition?
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Business Microeconomics Instructor: Gulnara Moldasheva 6 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?
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Business Microeconomics Instructor: Gulnara Moldasheva 7 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?
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Business Microeconomics Instructor: Gulnara Moldasheva 8 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. What Is Perfect Competition?
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Business Microeconomics Instructor: Gulnara Moldasheva 9
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Business Microeconomics Instructor: Gulnara Moldasheva 10 Figure 12.1(b) shows the firm’s total revenue curve ( TR )—the relationship between total revenue and quantity sold.
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