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Chapter 9

Chapter 9 Reading Notes.docx

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University of Toronto Mississauga
Michael H O

Chapter 9 Reading Notes • a market is said to have a competitive structure when its firms have little or no market power. The more market power the firms have, the less competitive is the market structure • Market power can influence the price of their product or the terms under which their product is sold. • When each firm has 0 market power, the firms in the market must accept the price that is set by the forces of market demand and market supply. If the firm sells it at a higher price, then they would make no sales. • in a perfectly competitive market, there is no need for individual firms to compete actively with one another because none has any power over the market. Assumptions of perfect competition 1. all the firms in the industry sell an identical product. Economists say that the firms sell a homogenous product. 2. consumers know the nature of the product being sold and the prices charged by each firm 3. the level of each firm's output at which its long run average cost reaches a minimum is small relative to the industry's total output. (this is a precise way of saying that each firm is small relative to the size of the industry) 4. the industry is characterized by freedom of entry and exit; existing firms can't block the entry of new firms. • the first three implies that each firm in a perfectly competitive industry is a price taker, meaning that the firm can alter its rate of production and sales without affecting the market price of its product. • btw* the demand curve in a perfectly competitive firm is horizontal. Because everyone has the same and equal demand of their products. THIS IS ON PAGE 200. Total, average, and marginal revenue • TR - total revenue - total amount received by the firm from the sale of a product. If Q units are sold at p dollars. TR = p(Q). p=bQ-a. this equation is like the y=mx+b formula. THIS IS IN THE NOTEBOOK. • AR - average revenue - the amount of revenue per unit sold. It is equal to total revenue divided by the number of units sold and is equal to the price at which the product is sold. AR = TR/Q = [p(Q)]/Q = p. • Marginal Revenue - MR - the change in a firm's total revenue resulting from a change in its sales by 1 unit, the change in revenue must be divided by the change in output to calculate the approximate marginal revenue. ON PAGE 202. MR = change in TR/ change in Q. • if the market price is unaffected by variations in the firm's output, the firm's demand curve, its average revenue curve, and its marginal revenue curve all coincide in the same horizontal line. • for a firm in perf competition, price equals marginal revenue Short Run Decisions. READ ON PAGE 203 • **RULE 1**, a firm shouldn't product at all if, for all levels of output, the total variable cost of producing that output exceeds the total revenue from selling it. Equivalently, the firm shouldn't produce at all if, for all levels of output, the average variable cost of producing the output exceeds the market price. • **RULE 2**, if it is worthwhile for the firm to product at all, the firm should produce the output at which marginal revenue equals marginal cost. • a profit maximizing firm that is operating in a perf competitive market will produce the output that equates its marginal cost of production with the market price of its product (as long as price exceeds average variable cost. • in a perf comp industry, the market determines the price that the firms have to sell, then the firm chooses the amount of production they need to make to reach max profits. • the perf comp firm adjusts its level of output in response to changes in the market-determined-price Short run Supply Curves ON PAGE 207 • a comp firm's supply curve is given by the portion of its marginal cost curve that is above its average variable cost curve. **THIS IS FOR ONE FIRM** o Rule 1: for prices below AVC, the competitive firm will supply 0 units. o Rules 2: for prices above AVC, the firm will choose its level of output to equate price and marginal cost • in perfect competition, the industry supply curve is the horizontal sum of the marginal cost curves (above the level of average variable cost) of all firms in the industry. **THIS IS FOR AN INDUSTRY** o each firm's marginal cost crve shows how much that firm will supply at each given market price, and the industry supply curve is the sum of what each firm will supply. Short Run Equlibrium. THIS IS ONE PAGE 208 • in a perf comp industry, the equilb is when the firm produces and sells a quantity for which its marginal cost equals the market price • when an industry is in short run eqilb, quantity demanded equals quantity supplied and each firm is maximizing its profits given the market price. • profits = TR - TC
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