ECON111 Lecture Notes - Lecture 9: Marginal Revenue, Diminishing Returns, Economic Surplus
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Perfect Competition
Perfect competition is a market 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.
It arises when each fi’s iiu effiiet sale is sall elatie to aket dead so thee is
roo fo ay fis i the aket, ad he poduts ae idetial so osues do’t ae hih
fi’s good they uy. Eah fi’s output is a perfect substitute for the output of the other firms, so
the dead fo eah fi’s output is pefetly elasti. However, the market demand is not perfectly
elastic because a T-shirt is a substitute for some other good.
In perfect competition, each firm is a price taker. No single firm can influence the price –it must
take the euiliiu aket pie.
Although firms cannot choose price, they must decide:
1. What quantity to produce: firms choose a level of output that maximises its economic profit.
a. � = TR – TC
.
i. At low output, thee’s a eooi loss –the fi a’t oe fixed costs.
ii. At intermediate output levels, the firm makes an economic profit.
iii. At high output levels, the firm again incurs an economic loss –now the firm
faces steeply rising costs because of diminishing returns.
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Document Summary
It arises when each fi(cid:396)(cid:373)"s (cid:373)i(cid:374)i(cid:373)u(cid:373) effi(cid:272)ie(cid:374)t s(cid:272)ale is s(cid:373)all (cid:396)elati(cid:448)e to (cid:373)a(cid:396)ket de(cid:373)a(cid:374)d so the(cid:396)e is roo(cid:373) fo(cid:396) (cid:373)a(cid:374)y fi(cid:396)(cid:373)s i(cid:374) the (cid:373)a(cid:396)ket, a(cid:374)d (cid:449)he(cid:374) p(cid:396)odu(cid:272)ts a(cid:396)e ide(cid:374)ti(cid:272)al so (cid:272)o(cid:374)su(cid:373)e(cid:396)s do(cid:374)"t (cid:272)a(cid:396)e (cid:449)hi(cid:272)h fi(cid:396)(cid:373)"s good they (cid:271)uy. Ea(cid:272)h fi(cid:396)(cid:373)"s output is a perfect substitute for the output of the other firms, so the de(cid:373)a(cid:374)d fo(cid:396) ea(cid:272)h fi(cid:396)(cid:373)"s output is pe(cid:396)fe(cid:272)tly elasti(cid:272). However, the market demand is not perfectly elastic because a t-shirt is a substitute for some other good. In perfect competition, each firm is a price taker. No single firm can influence the price it must (cid:862)take(cid:863) the e(cid:395)uili(cid:271)(cid:396)iu(cid:373) (cid:373)a(cid:396)ket p(cid:396)i(cid:272)e. If the firm decides to stay in the market, it must decide whether to produce something or to shut down temporarily. The decision will (cid:271)e the o(cid:374)e that (cid:373)i(cid:374)i(cid:373)ises the fi(cid:396)(cid:373)"s loss. If the firm shuts down, q is 0 and the firm still has to pay its tfc.
