MODULE 6: Perfect Competition
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
