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Lecture 9

ECON 1B03 Lecture Notes - Lecture 9: Perfect Competition, Takers

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Aleksandra Gajic

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Chapter 14: Firms in Perfectly Competitive Markets
Perfect Competition
Many buyers and sellers in the market
Goods are homogenous (identical)
Firms freely enter and exit the market
No barriers to entry
Market demand and supply determine price
oEvery $rm takes the market price as given—they are price takers
Denoted by pi, pro$t is equal to total revenue – total costs
Average Revenue
Revenue $rm receives for a typical unit sold
Average revenue is total revenue divided by the quantity sold
Marginal Reneue
Change in total revenue from an additional unit sold
MR = change in TR / change in Q
Slope of the total revenue function
Since TR = PQ and P is given, if we increase Q by 1 unit, TR will increase by
the P of the good
MR = P for a perfectly competitive $rm
*this is only true for competitive $rms
Golden Rule
A pro$t-maximizing $rm will produce a quantity of output where
Because a $rm will always produce P = MC, it is actually the MC curve that
determines Q
The $rm’s supply curve is its MC curve
SR Shutdown Decision
Sometimes a $rm will choose not to produce anything at all
It may choose to temporarily shut down in the SR because of market
It will shut down in the SR if P<AVC
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