ECON 1B03 Lecture Notes - Lecture 1: Economic Equilibrium, Marginal Revenue, Perfect Competition
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ECON 1B03- Week 8 October 24, 2018
Perfect Competition in the Short Run:
Choosing the Profit Maximizing Quantity to Produce
Recall: A perfectly competitive market has the following characteristics:
• There are many buyers and sellers in the market. Market demand and supply determine
price and every buyer and firm takes the market equilibrium price as given – they are
• The goods offered by the various sellers are homogeneous (identical).
• Firms can freely enter or exit the market.
There are no barriers to entry such as patents, exclusive rights to a key input to production, etc
• Total revenue for a firm is the selling price times the quantity sold.
TR = PQ
• Since P is given (a number), the TR curve is a linear function of Q.
• Let’s draw one and throw in a typical TC curve.
• Average revenue, AR, tells us how much revenue a firm receives for the typical unit sold.
• Average revenue is total revenue divided by the quantity sold.
AR = TR = PQ = P
• Now, how much additional revenue does a firm receive if it increases production by one
Marginal Revenue = the change in total revenue from an additional unit sold.
MR =TR/ Q
MR is the slope of the total revenue function.
• Since TR = PQ and P is given (because firms are price takers), if we increase Q by 1 unit,
TR will increase by the P of the good. Therefore,
MR = P for a perfectly
*This is true only for competitive firms that are price takers. For all other market structures, MR
does not equal P.
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