ECON101 Lecture Notes - Lecture 8: Economic Equilibrium, Market Power, Imperfect Competition

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Markets
subdivide market into two categories: perfect competition, imperfect
competition
perfectly competitive market structure
definition
an industry composed of large number of firms producing/supplying a
homogeneous product (product is identical in all aspects)
critical assumptions
1. because there are a large number of firms in the industry, no single firm
through independent action can affect the market price
2. because the product is homogenous, consumers can not differentiate the
product according to supply
3. there are no barriers to entry or exit to and from the industry
existing firms are free to leave the industry, new firms are free to come into
the industry
4. factors of production are completely mobile (land, labour, capital,
entrepreneurship, technology) they can move from one firm to another
5. firms in the industry have complete knowledge regarding future market
conditions
6. there is no intervention with the market (no restrictions imposed on
market price or output)
7. goal of the firm is to maximize profits, to do so the firm must push
production to the point where marginal revenue (addition to total revenue
from the production/sale of each additional unit of output) = marginal cost
(additional to total cost from the production of each additional unit of output)
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