Textbook Guide Economics: Average Variable Cost, Sunk Costs, Market Power
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ECO101H1 Full Course Notes
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A competitive market has many buyers and sellers. The goods and services sold in a competitive market are homogeneous, or nearly identical. Both the firms and the sellers in a competitive market are price takers. This means that a single buyer or seller has no effect on the price. In a competitive market there are no barriers to entry, and firms can enter or exit the market freely. Since firms in a competitive market are price takers and cannot raise the price of their product, the only way to increase revenue is by increasing output. For a competitive firm, marginal revenue = price. Average revenue = total revenue / quantity sold. The competitive firm should produce until marginal cost = marginal revenue. If marginal revenue is greater than marginal cost, the firm can increase profit by increasing output. According to the figure below, if the firm is producing in q1, it should raise production.