ECON 3530 Chapter Notes - Chapter 3: Marginal Cost, Perfect Competition, Substitute Good

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Assumptions: homogeneous perfectly divisible output all firms sell an identical product and consumers are indifferent between them, perfect information buyers and seller have all relevant information about the market, including the price and quality of the product, no transaction costs neither buyers nor sellers incur costs or fees to participate in the market, price taking buyers and sellers cannot individually influence the price at which the product can be purchased or sold, no externalities each firm bears the full costs of its production process. 1) profit maximization: a competitive firms profits = (price x quantity) total cost, firm faces a horizontal demand curve at price "p , the optimal production rule (profit maximizing) for a competitive firm is to expand its output until mc = p, as price rises, the firm moves up its mc curve and profits rise, as price falls, the firm moves down its mc curve and profits fall.

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