ECON 10a Lecture Notes - Lecture 14: Marginal Revenue, Perfect Competition

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Econ 10a Ch. 14: Firms in Competitive Markets
Market Structure: Perfect Competition in Firms
1. 4 Conditions to Perfect Competition
a. Lots of firms, each one small
b. Firms produce an identical product, not merely just similar
c. Perfect information at all levels. Customers have knowledge of product makeup,
trends, etc.
d. Freedom of Entry and Exit (In the long-run)
2. Demand Curve for a Perfectly Competitive Firm
a. For a single producer, curve is perfectly horizontal if produces below or at market
price. (Qd X axis, Price Y axis)
i. This is a result of the # firms in a market being too small
b. Marginal Revenue
i. Marginal Revenue is how much a firm’s revenue rises when it produces
and sells one more unit
c. Relationship Between Demand Curve and Marginal Revenue
i. In perfect competition, Demand Curve = Marginal Revenue
ii. However, outside of perfect competition Demand Curve and Marginal
Revenue represent different curves
3. Short-Run Profit Maximization
a. Easy Case
i. Profit = Rev - TC
ii. However, in the short-run. Profit = Rev - VC - FC
1. If Q = 0. Profit = -FC
iii. Profit Hill = Profit as it relates to Quantity. Firm attempts to find profit by
finding the Quantity where Marginal Revenue intersects Marginal Costs
b. Hard Case
i. In most cases however. Marginal Revenue often intersects Marginal
Costs at 2 points.
ii. Past the first point of Marginal Revenue, Profit goes up but perhaps does
not meet the initial costs
c. 2 Candidates for Profit Maximizing Quantity
i. Quantity 0 (Shutdown)
ii. Q*, where MR intersects rising MC
iii. Either produce nothing, or Q*
1. Which one?
a. If you shut down/Q=0, profit = -fixed costs
b. If you operate at Q*, profit = Rev - VS - FC
i. Whichever is the least is what the firm will do, or
rather whoever has the largest Profit, or the
smallest deficit.
ii. Shutdown if price < AVC at Q*.
d. 2 Stage Rule for Profit-Maximization
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Document Summary

Market structure: perfect competition in firms: 4 conditions to perfect competition, lots of firms, each one small, firms produce an identical product, not merely just similar, perfect information at all levels. In perfect competition, demand curve = marginal revenue: however, outside of perfect competition demand curve and marginal. Revenue represent different curves: short-run profit maximization, easy case. Profit = rev - tc: however, in the short-run. Profit = rev - vc - fc: if q = 0. Profit hill = profit as it relates to quantity. Firm attempts to find profit by finding the quantity where marginal revenue intersects marginal costs: hard case. Past the first point of marginal revenue, profit goes up but perhaps does not meet the initial costs: 2 candidates for profit maximizing quantity, quantity 0 (shutdown, q*, where mr intersects rising mc. Shutdown if price < avc at q*: 2 stage rule for profit-maximization. Step 1: find q*, the q where mr intersects rising mc curve.

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