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Lecture: Perfect Competition

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University of Guelph
ECON 1050

MICROECONOMICS Perfect CompetitionOverviewdefintion of perfect competitionoutput price and employment decisions in perfectly competitive marketsentry and exit of firms intofrom the competitive marketeffects of price changes demand changes and technological advantagesIntroductionperfect competition industry in which o many firms sell identical products to many buyers o no restrictions to entry into the industry o established firms have no advantages over new onesno core competency one firm does something very well and other firms wish they had that ability o sellers and buyers are well informed about pricesperfect competition arises when o firms minimum efficient scale is small relative to market demandallows room for many firms in the industry o firms product is perceived as having no unique characteristicsconsumers are indifferent as to which firm to buy fromprice takers firm that cannot influence the price of a good or service must take equilibrium market price o in perfect competition all firms are price takersproducts are perfect substitutesperfectly elastic demandEconomic Profit and Revenuefirms want to maximize economic profit total revenuetotal cost o total costOC of production and includes normal profit o total revenue price x quantity sold P x Q o marginal revenue change in total revenue resulting from a oneunit increase in the quantity soldwhen marginal revenue is constant the total revenue increases by the price of the good with every oneunit increase in salesin perfect competition marginal revenuepricefirms demand curve for a product is horizontal perfectly elastic at the market price o this is true because on firms sweater is a perfect substitute for another firms sweatermarket demand is not perfectly elastic because a sweater is a substitute for some other good
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