Microeconomics – Chapter 12
A market in which:
-Many firms sell identical products to many buyers
-There are no restrictions on entry into the market
-Established firms have no advantage over new ones
-Sellers and buyers are well informed about prices
Examples of competitive industries: farming, photo finishing, plumbing, dry cleaning
Perfect competition arises if the minimum efficient scale of a single producer is
small relative to the market demand for the good or service.
Price Taker – firm that cannot influence the market price because its production is
an insignificant part of the total market
Firms in perfect competition are price takers.
Total Revenue – equals the price of its output multiplied by the number of units of
output sold (price x quantity)
Marginal Revenue – change in total revenue that results from a one-unit increase in
the quantity sold
-calculated by dividing the change in total revenue by the change in the
In perfect competition, the firm’s marginal revenue equals the market price.
Because the marginal revenue curve is elastic, it shows that the product is a perfect
substitute for a product from any other factory.
The market demand for the product is not perfectly elastic: Its elasticity depends on
the substitutability of sweaters for other goods and services.
To maximize economic profit, a firm must decide:
1. How to produce at minimum cost
-does so by operating with the plant that minimizes long-run average
cost- by being on its long run average cost curve
2. What quantity to produce
-find it using the firm’s cost curves and revenue curves
-economic profit = TR – TC
-can also find it by comparing MR with MC -as output increases, firm’s MR is constant, but MC eventually
-if MR>MC, then revenue from selling one more unit exceeds the cost
of producing it and an increase in output increases economic profit