Perfect competition definitions

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Intros
Lessons
  1. Perfect Competition Definitions Overview:
  2. Perfect Competition
    • Definition of Perfect Competition
    • 4 conditions of perfect competition
    • Price Takers
  3. Economic Profit and Revenue
    • Total Revenue, Marginal Revenue
    • Demand, Total Revenue Graph
    • Marginal Revenue is horizontal
  4. Decision of Firms
    • Produce at the lowest cost
    • Decide what quantity to produce
    • Enter or Exit the Market
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Examples
Lessons
  1. Understanding Perfect Competition, Marginal Revenue, & Total Revenue
    The demand curve for the firm's output is a_____________.
    1. Vertical line
    2. Horizontal line
    3. Line with positive slope
    4. Line with negative slope
  2. Which of the following does is not one of the conditions for a perfect competition?
    1. Firms find it easy to enter & exit the market
    2. Buyers and sellers are well informed
    3. Many firms sell identical products to many buyers
    4. Established firms have an advantage over new firms
  3. Bella makes mac & cheese that are identical to those made by other firms. There is free entry in the mac & cheese market. Both buyers and sellers are well informed about prices.
    1. What market is Bella operating in?
    2. If mac & cheese sell for $5 a box, and Bella sells 100 of them for $5.10 a box, how many boxes will sell? What will her revenue be?
    3. If mac & cheese sell for $5 a box, and Bella sells 100 of them for $4.90 a box, how many boxes will sell? What will her revenue be?
  4. Suppose John makes shoes that are identical to many other firms, and there is free entry in the market. Both buyers and sellers are well informed about prices. If the market price is $10, then
    1. Should John set his price for shoes higher than the market price? Why?
    2. Graph the demand curve for John's output of shoes.
    3. If he sells shoes at $10 each, graph the total revenue curve.
Topic Notes
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Perfect Competition

Perfect Competition is a market that has a lot of small firms which can produce a similar good for sale and profit.


No firm’s product is better than another firm. The goods are perfect substitutes.


For a market to have perfect competition, 4 conditions must apply:

  1. Many firms sell identical products to many buyers
  2. Firms find it easy to enter & exit the market
  3. Established firms have no advantage over new firms
  4. Buyers and sellers are well informed (everyone has full information)

Price Takers: a firm that cannot influence the market price due to the firm only selling a fraction of the market output.


Economic Profit & Revenue

The goal of a firm is to always maximize profit. To calculate profit, we take the revenue and subtract it by cost.

P = R - C

To maximize profit, we need to get the highest possible revenue with the lowest possible cost.


Total Revenue: is the price of it’s output multiplied by the number of units of output sold. In other words,

R = p x q

Economic profit & revenue curve

Marginal Revenue: is the additional revenue gained from a one-unit increase in quantity sold.


In perfect competition, the marginal revenue (demand curve for firm) is horizontal because firm’s have no influence on market price. So, they must sell all the products at the same price.


Economic profit & revenue marginal revenue curve

Decision of Firms

In a perfect competition, must decide on

  1. How to produce at the lowest cost
  2. How many quantities to produce
  3. Should the firm enter or exit the market