ECON 208 Chapter Notes - Chapter 9: Longrun, Average Variable Cost, Perfect Competition

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Chapter 9 - Competitive Markets
Competitive Market Structure the influence that individual
firms have on market prices
Competitive Behaviour the degree to which individual firms
actively vie with one another for business
Market Power the ability of a firm to influence the price of a
product of the terms under which it is sold
Perfect Competition a market structure in which all firms in an
industry are price takers and in which there is freedom of entry
and exit from an industry
Homogenous Product every unit of the product is identical to
every other unit, in the eyes of purchasers
Price Taker a firm that can alter its rate of production and
sales without affecting the market price of its product
Total Revenue (TR) total receipts from the sale of a product
Average Revenue (AR) market price when all units are sold at
the same price; total revenue divided by quantity sold
Marginal Revenue (MR) the change in a firm’s total revenue
resulting from a change in its sales by one unit
Shut-Down Price the price that is equal to the minimum of a
firm’s average variable cost. At prices below this, a profit-
maximizing firm will shut down and produce no output
Short-Run Equilibrium for a competitive industry, the price
and output at which industry demand equals short-run industry
supply, and all firms are maximizing their profits
Break-Even Price the price at which a firm is just able to cover
all of its costs, including the opportunity cost of capital
-A market is said to have a competitive market structure
when its firms have little or no market power
-The more market power the firms have, the less competitive
is the market structure
-Zero market power: perfectly competitive market
Theory of Perfect Competition
1. all firms sell a homogeneous product
2. Customers know the product and each firm’s price
3. Each firm reaches its minimum LRAC at a level of output
that is small relative to the industry’s total output
4. Firms are free to enter and exit the industry
Industry’s demand curve is negatively sloped.
Competitive firm’s demand curve is horizontal because
variations in the firm’s output have no significant effect on price
If the market price is unaffected
by variations in the firms output,
AR, MR and demand curve all
coincide in same horizontal line
(perfect competition)
1
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