Economics 1021A/B Lecture Notes - Market Power, Substitute Good, Marginal Revenue

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Economics Chapter 12
Perfect Competition
Selling of identical products
No entry restrictions
Sellers and buyers are well informed about prices
Old firms have no advantage over new ones
-How perfect competition arises
Minimum efficient scale is small relative to market demand room for many
firms
Minimum efficient scale smallest output at which long-run average cost
reaches its lowest level
-Price takers
A firm that cannot influence the price of a good or service
In perfect competition, each firm is a price taker
Perfect substitutes between firms
-Economic Profit and Revenue
Goal maximize economic profit = Total revenue minus Total cost
Total cost opportunity cost of production
Total revenue Price x Quantity sold
Marginal revenue change in total revenue that results form a one-unit
increase in quantity sold, change in total revenue / change in the quantity
sold, market price
-Demand for the firm’s products
Sell any quantity it chooses at the market price
Horizontal demand curve
Perfectly elastic demand
Goods are perfect substitutes for other goods
Market demand is not perfectly elastic, depends on the substitutability of a
good for other goods and services
-Firm’s decisions
1. How to produce at minimum cost
2. What quantity to produce
3. Enter or exit a market
Economic profit = TR TC
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-Marginal Analysis and Supply Decision
Marginal analysis determine the profit-maximizing output
Marginal Revenue = Marginal Cost
MR > MC
o Economic profit increases if output increases
MR < MC
o Economic profit decreases if output increase
MR = MC
o Economic profit decreases if output changes in either direction, so
economic profit is maximized
-Temporary Shutdown Decision
If there is an economic loss
Decisions: exit the market (long run), stay in the market produce something
or shut down temporarily (weekends, certain days)
-Loss Comparison
Economic loss = TC TR
= (TFC + TVC) TR
= TFC + AVC x Q P x Q
= TFC + (AVC P) x Q
Choose 0 quantity by shutting down
Loss = TFC
Loss is the largest that the firm must bear
-Shutdown point
It’s indifferent between producing and temporarily shutting down
AVC is at its minimum
MC curve crosses the AVC curve and MC curve
Output, Price and Profit in the Short Run
-Market Supply in the Short Run
Short Run Market Supply Curve quantity supplied by all firms together at
each price when each firm’s plant and the number of firms remain the same
-A Change in Demand
An increase in demand brings a rightward shift of the market demand curve
o The price rises and the quantity increases
A decrease in demand bring a leftward shift of the market demand curve
o The price falls and the quantity decreases
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Document Summary

Sellers and buyers are well informed about prices. Old firms have no advantage over new ones. Minimum efficient scale is small relative to market demand room for many firms. Minimum efficient scale smallest output at which long-run average cost reaches its lowest level. A firm that cannot influence the price of a good or service. In perfect competition, each firm is a price taker. Goal maximize economic profit = total revenue minus total cost. Total cost opportunity cost of production. Total revenue price x quantity sold. Marginal revenue change in total revenue that results form a one-unit increase in quantity sold, change in total revenue / change in the quantity sold, market price. Sell any quantity it chooses at the market price. Goods are perfect substitutes for other goods. Market demand is not perfectly elastic, depends on the substitutability of a good for other goods and services.

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