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Chapter 12

Economics Chapter 12 Perfect Competition.docx

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University of Guelph
ECON 1050
Eveline Adomait

Economics Chapter 12 Perfect Competition Perfect Competition: - many firms sell identical products to many buyers - there are no restirctions on entry into the market - established firms have no advantage over new ones - sellers and buyers are well informed about prices PC arises if the minimum efficient scale of a single producer is small relative to the market demand for the good or service. Room in market for many firms. Minimum efficient scale is smallest output at which long-run average cost reaches its lowest level In PC each firms produces a good that has no unique characteristcis, so consumers don’t care which firm’s good they buy Price takers- a firm that cannot influence the market price because its production is an insignificant part of the total market Firms goal is to maximize economic profit, which is equal to total revenue minus total cost Total cost is opportunity cost of production, which includes normal profit Total revenue equals price of its output multiplied by number of units of output sold (price x quantity) Marginal revenue is change in total revenue that results from a one-unit increase in quantity sold. Calculated by dividing change in total revenue by the change in quantity sold Demand for the firm’s product - firm can sell any quantity it chooses at market price - demand curve for firm’s production is horizontal line at the market price, same as firm’s marginal revenue curve - horiztonal demand curve illustrates a perfectly elastic demand, so demand for firm’s product is perfectly elastic To achieve maximum profit goal, firm must decide 1. how to produce at minimum cost 2. what quantity to produce 3. whether to enter or exit a market Firm’s output decisions Cost curve describes relationship between output and cost Revenue curve describes relationship between output and revenue We can find output that maximizes profit from cost curve and revenue curve Temporary shutdown decision Loss comparison - firms economic loss equals total fixed cost, TFC, plus total variable cost minus total revenue - total variable cost equals avg. variable cost, AVC, multiplied by quantity produced, Q, and total revenue equals price, P, multiplied by quantity Q therefore, economic loss = TFC + (AVC-P) X Q shutdown point- the price and quantity at which it is indifferent between producing and shutting down occurs at price and quantity at which avg. variable cost is a minimum firm;s supply curve - shows how firm’s profit-maximizing output varies as market price varies ceterus paribus - derived from firm’s marginal cost and avg. variable cost curves - when P > minimum avg. variable cost, firm maximizes profit by produci
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