ECON 103 Lecture Notes - Market Power, Marginal Revenue, Perfect Competition

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19 Apr 2013
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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
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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:
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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:
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