Econ 101 Final Material
1. All firms produce a homogenous product.
2. Consumers and producers posses relevant information.
3. Many consumers and many producers.
4. Freedom of entry and freedom of exit.
5. Individual firms are price takers. This means individual firms take the price as given, and
therefore the price remains the same.Aperfectly competitive firm faces a perfectly elastic
R1 = Pq
R2 = P(q+1)
MR = R2 – R1 = P(q+1) – Pq
MR = Pq + p – Pq
So, margin revenue (MR) = price for every quantity.
Profit Maximization in the Short Run:Any firm maximizes its profits at the quantity where MR = MC.
For a perfectly competitive firm, it maximizes its profits at the quantity where P = MC since P is
always equal to MR.
1. Find the quantity where P = MC call it q*
2. Check the shut down rule;
1. If P >AVC the firm produces q*
2. If P