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ECON 103
Vera Lantinova

Fraser International College ECON1034 “Principles of Microeconomics” Chapter 12: Perfect Competition THE KEY CONCEPTS in this chapter: - Perfect competition as a type of a market - Revenue and profit - Individual and market demand that a firm faces in perfect competition - Shutdown decision - Individual supply and market supply in perfect competition - Short-run market equilibrium - Long –run market equilibrium - Changes in market equilibrium Perfect competition is such a market in which - many firms sell identical products to many buyers - each firm produces a good that has no unique characteristics and, thus, consumers don’t care from which firm to buy - there are no restriction on entry into the market, with main aim of earning profit. - established firms have no advantage over new ones - minimum efficient scale of a single firm is small relatively to the market demand for the good (a firm needs to produce a relatively small quantity of output to achieve the lowest average total cost in the long run) - sellers and buyers are well informed about the prices - firms are price takers: firms take a price for their product as given, cannot influence the price, because 1 Revenues, profits, and demand in perfect competition Recall: total revenue is Price X Quantity Sold, Profit is TR-TC Marginal revenue is the change in total revenue that results from Because in perfect competition a firm is a price taker, marginal revenue is equal to the market price of a good. MC=MR Graphically, we can show this as follows: We distinguish between market demand and demand that an individual firm faces: 2 Profit maximization To achieve maximum profits, a firm needs to decide: 1. How to produce at minimum cost: choose such a plant size that minimizes long-run average cost 2. What quantity to produce: compare (total or marginal) cost to (total or marginal) revenue of producing output 3. Whether to shutdown or continue to produce Firm’s decision on what quantity to produce: 1. Compare total cost to total benefit of producing output: 2. Compare marginal cost to marginal benefit of producing output: 3 Firm’s decision on whether to shutdown or continue to produce: Temporary shutdown means To make decision about temporary shutdown,
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