ECON 1000 Lecture Notes - Lecture 12: Market Power, Marginal Revenue, Perfect Competition
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Market in which: many firms sell identical products to many buyers, no restrictions to entry into the industry, established firms have no advantages over new ones, sellers and buyers are well informed about prices. How perfect competition arises: minimum efficient scale is small relative to market demand, room for many firms in the market, produce a good or service that has no unique characteristics, consumer don"t care which firm"s good they buy. Perfectly competitive goal = maximum economic profit: how to produce at minimum cost, what quantity to produce, whether to enter or exit a market. Start by looking at the firm"s output decision. Perfectly competitive firm chooses the output that maximizes its economic profit. When economic loss occurs, firms must decide whether to exit the market or to stay in the market. If stays, must decide whether to produce something or to shut down temporarily. Economic loss = tfc + tvc tr. = tfc + (avc p) x q.