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Lecture 1

ECON 1B03 Lecture Notes - Lecture 1: Economic Equilibrium, Marginal Revenue, Perfect Competition

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Hannah Holmes

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ECON 1B03- Week 8 October 24, 2018
Module 7
Perfect Competition in the Short Run:
Choosing the Profit Maximizing Quantity to Produce
Perfect Competition
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
price takers.
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.
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
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
Marginal Revenue
Now, how much additional revenue does a firm receive if it increases production by one
more good?
We define:
Marginal Revenue = the change in total revenue from an additional unit sold.
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
competitive firm*
*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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