FNCE 370 Lecture Notes - Lecture 16: Marginal Cost, Demand Curve, Perfect Competition
Document Summary
Many sellers: there are many firms competing for the same group of customers. Product differentiation: each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve. Free entry and exit: firms can enter or exit the market without restriction. Profit encourages entry, and entry shifts the demand curves faced by the incumbent firms to the left. As the demand for incumbent firms" products fall, these firms experience declining profit. This process continues until these firms are experiencing zero economic profit. As in a monopoly market, price exceeds marginal cost. This conclusion arises because profit maximization requires marginal revenue to equal marginal cost and because the downward-sloping demand curve makes marginal revenue less than the price. As in a competitive market, price equals average total cost. This conclusion arises because free entry and exit drive economic profit to zero: monopolistic vs.
