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Chapter 7

ECN 104 Chapter Notes - Chapter 7: Competitive Equilibrium

Course Code
ECN 104
Halis Yildiz

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Chapter 7: Perfect Competition
7.1 Four Market Structures
Perfect competition: a market structure in which a very large number of firms produce a standardized
product; product identical to that of other producers, new firms can enter the industry very easy (Ex.
Corn or cucumbers)
Monopoly: a market structure in which one firm is the sole seller of a product/service; produces a
unique product (Ex. Regional electrical power supplier)
Monopolistic competition: a market structure in which a relatively large number of sellers produce
differentiated products (Ex. Clothing, furniture, books)
Non price competition: selling strategy in which one firm tries to distinguish product/service
from all competing products (product differentiation)
Oligopoly: a market structure in which a few large turns produce homogeneous/differentiated products;
firm affected by decisions of rivals and take those decisions into account when determining own price &
Imperfect competition: the market models of monopoly, monopolistic competition, and oligopoly
considered as a group
7.2 Characteristics of Perfect Competition & the Firms Demand Curve
Very large numbers: presence of large numbers of sellers offering products in large
national/international markets (Ex. Farm commodities market, stock market, foreign exchange market)
Standardized product: produce identical/homogeneous product; make no attempt to differentiate
products and don’t engage in forms of non price competition
Price-takers: a firm in a purely competitive market that cannot change market price, only adjust to it
Easy entity and exit: new firms can enter, existing firms can leave
Average, Total, and Marginal Revenue
Average revenue: total revenue from the scale of a product divided by the quantity of the product sold
Total revenue: the total number of dollars received by a firm from the sale of a product

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Marginal revenue: the change in total revenue tat results from selling one more unit of a firms product
7.3 Profit Maximization in the Short Run
Total-Revenue – Total-Cost Approach
Total revenue and total cost are equal when the two curves intersect
Break-even point: an output at which a firm makes normal profit but not an economic profit
Total revenue covers all cost (normal profit) but no economic profit
Output between two break even point will yield economic profit
Marginal-Revenue – Marginal-Cost Approach
Compare amounts for each additional unit of output would add to total revenue and total cost
If marginal cost exceeds marginal revenue, no production of unit; would add more costs than
revenue (profit decline, loss increase)
In the short-run, the firm will maximize profit/minimize loss by producing the output at which
MR = MC Rule: a method of determining the total output at which economic profit is at a
maximum (or losses are at a minimum)
Will precisely equal at a fractional level of output, should produce the last complete
Rule applies only if producing is preferable to shutting down
Accurate guide to profit maximization for all firms
P = MC when applied to firms in perfectly competitive industry (Profit=(P-A)xQ)
Profit Maximization in the Short Run:
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