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Lecture #16 - Nov 14.docx

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Western University
Economics 1021A/B
Michael Parkin

Nicole Wallenburg Economics Parkin Nov 14, 2011 Economics – Lecture #16 Perfect Competition Perfect competition is an industry in which  Many firms sell identical products to many buyers.  There are no restrictions to entry into the industry.  Established firms have no advantages over new ones.  Sellers and buyers are well informed about prices.  Example: o Corn, rice How Perfect Competition Arises Perfect competition arises:  When firm’s minimum efficient scale is small relative to market demand so there is room for many firms in the industry.  And when each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm they buy from. Price Takers In perfect competition, each firm is a price taker.  A price taker is a firm that cannot influence the price of a good or service.  No single firm can influence the price—it must “take” the equilibrium market price.  Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic. Economic Profit and Revenue The goal of each firm is to maximize economic profit, which equals total revenue minus total cost. Total cost is the opportunity cost of production, which includes normal profit.  A firm’s total revenue equals price, P, multiplied by quantity sold, Q, or P × Q.  A firm’s marginal revenue is the change in total revenue that results from a one- unit increase in the quantity sold. Nicole Wallenburg Economics Parkin Nov 14, 2011  The demand for a firm’s product is perfectly elastic because one firm’s sweater is a perfect substitute for the sweater of another firm.  The market demand is not perfectly elastic because a sweater is not a perfect substitute for other goods. A perfectly competitive firm’s goal is to make maximum economic profit, given the constraints it faces. The firm must decide: 1. How to produce at minimum cost 2. What quantity to produce 3. Whether to enter or exit a market You studied 1 last week. We now look at the firm’s output decision—the quantity to produce. On Wednesday we look at entry and exit decisions. The Firm’s Output Decision Spreadsheet Analysis and Supply Decision The firm can use a spreadsheet to determine the profit-maximizing output. Figure 12.2 on the next slide shows how the firm determines its profit-maximizing output in a spreadsheet Total Total Economic Quantity revenue cost profit 0 0 22 -22 1 25 45 -20 2 50 66 -16 3 75 85 -10 4 100
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