ECON101 Lecture Notes - Lecture 9: Perfect Competition, Economic Equilibrium, Marginal Revenue

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3 Feb 2016
Department
Course
PERFECT COMPETITION
Read Chapter 9
Objectives:
9.1 Identify and explain the characteristics of a perfectly competitive market
structure.
9.2 Using revenue and cost information, determine the firm’s short-run
profit maximizing or loss minimizing level of output and profit.
9.3 Derive the firm’s short-run supply curve and explain how the short-run
equilibrium price is determined in a perfectly competitive market.
9.4 Explain the features and long-run adjustments associated with long-run
equilibrium in perfect competition.
9.5 Explain the three different long-run industry supply curve situations that
are possible in perfect competition.
9.6 From a social viewpoint, evaluate the long-run behaviour in perfect
competition.
OBJECTIVE 9.1: Identify and explain the characteristics of a perfectly competitive
market structure.
1. VERY LARGE NUMBER OF SELLERS
2. STANDARDIZED PRODUCT
3. PRICE TAKER - SELLERS EXERT NO CONTROL OVER PRODUCT PRICE
4. FREE ENTRY & EXIT
DEMAND TO A COMPETITIVE SELLER
THE DEMAND CURVE IS PERFECTLY ELASTIC (GET THE SAME PRICE NO
MATTER WHAT THE QUANTITY SUPPLIED) FOR EACH INDIVIDUAL FIRM
AS A GROUP - SUPPLY CAN BE AFFECTED AND THEREFORE PRICE MEANING
THE DEMAND CURVE WOULD BE SLIGHTLY DOWNSLOPING
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Objective 9.2 Using revenue and cost information, determine the firm’s short-run
profit maximizing or loss minimizing level of output and profit.
PRICE AND AVERAGE REVENUE ARE THE SAME THING
AR = TR/Q
TOTAL REVENUE = PRICE x QUANTITY SOLD
MARGINAL REVENUE IS THE ADDITION TO TOTAL REVENUE OF ONE EXTRA
UNIT - OR THE PRICE OF ONE EXTRA UNIT IF PRICE IS CONSTANT
MR = change TR / change Q or P = MR
P Q TR TC AR MR MC
30 0 0 55 -
30 1 30 85 30 30 30
30 2 60 110 30 30 25
30 3 90 130 30 30 20
30 4 120 160 30 30 30
30 5 150 210 30 30 50
30 6 180 280 30 30 70
1. TOTAL RECEIPTS - TOTAL COST APPROACH
Producer must answer 3 questions when knowing what the price of
the product is
a. Should we produce
b. What amount
c. What profit or loss will be realised
a. Should we produce - remembering fixed costs must be paid even
if the firm is producing nothing the answer would be YES if
the firm can realise either an economic profit or a loss less
than fixed costs
b. How much to produce - produce that output that maximizes
profits or minimizes losses. MR or P = MC
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