MODULE 6: Perfect Competition

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In a perfectly competitive market, homogeneity means that firms must charge the market price for the goods or the services they produce because

- there are hundreds of other perfectly good substitutes -the market is competitive

perfect competition

a market structure characterized by the interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogenous, product

As the market price of a good increases, all else held constant,

a profit-maximizing firm that produces the good can afford to expand its production

Average revenue

amount of revenue per unit of a product sold

In a perfectly competitive market, we assume the product is identical in the minds of

consumers

As the market price decreases, all else held constant, a profit-maximizing firm can

decrease its production

Marginal revenue

extra or additional revenue associated with the production of an additional unit of output

Price Takers

firms that take or accept the market price and have no ability to influence that price

Normal Profit

known as zero economic profit *Economic profit is total revenue minus economic costs, which include both explicit and implicit costs of production. When TR and TC are equal, this is called "notmal profit."

A perfectly competitive firm should produce output until the point where

marginal revenue equals marginal cost

The demand for a perfectly competitive firm's product is a horizontal line originating at the

market price *In perfect competition, MR = P. As a result, demand is also a perfectly elastic line at the market price

In a perfectly competitive market, the price the firm should charge is the market price because the firm is a

price taker

In a perfectly competitive market, homogeneity means that firms must charge the same market price for the goods or the services they produce because there are hundreds of other perfectly good

subsitutes

When the total revenue earned by a firm is less than the total cost of production

the firm faces a loss

Total Revenue

the price of a good times the number of units sold

Average revenue

the total revenue divided by the number of units of a product sold

Profit equals

total revenue minus total cost


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