ECON101 Lecture Notes - Lecture 13: Perfect Competition, Marginal Revenue

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2 Aug 2016
Class 13 – Chapter 13/14
Chapter 13
AFC is always decreasing (as you divide by more of a quantity)
Diminishing MP is increasing MC (large quantities)
oand vice versa
As Q increasing, AFC pulls the ATC down
oAFC will not be as affected as the Q keeps increasing, so ATC will begin to go
back up
Where MC and ATC cross, ATC is at the minimum
oBefore that ATC is falling
oAfter that ATC is rising
Short run vs long run
oShort run: Some inputs are fixed (eg. land/factories)
oLong run: all inputs are variable (eg. can build/sell factories)
oIntersections of the SRATC is where you move to the new factory size
oEconomies of scale before constant returns to scale (min of LRAC)
ATC falls as Q increases
Occur when increasing production allows for greater specialization
Works are more efficient when focusing on a narrow task
oDiseconomies of scale after CRTS
ATC rises as Q increases
Management issues
Can’t control costs
Chapter 14
Perfect Competition
oMany buyers/sellers
oGoods are the same
oFirms have basically no barriers to entry or exit
oPrice taker
Total Revenue = P x Q
oAverage Revenue = TR/Q
Also equal to the price
oMarginal Revenue = change in TR / change in Q
The price of selling one more unit
MR will be the price too **for perfect competition
Profit Max
Perfect competition operates at a profit of $0 (economic)
oIf MR>MC, Q should increase to raise the profit
oIf MR<MC then Q should reduce to raise profit
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