Scribd
Upload
51 views9 pages

ECC101 - Chapter 12 - Part 1

This document discusses the concept of perfect competition. It defines perfect competition as a market with many small firms and buyers, no barriers to entry/exit, access to information for all participants, and identical products. Under perfect competition, firms are price takers and cannot influence the market price. The document explains that a firm will produce the quantity where marginal revenue equals marginal cost to maximize profits, and may shut down if price falls below average variable cost. It also describes how market supply and demand determine the market price and quantity in perfect competition.

Uploaded by

Asande
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
51 views9 pages

ECC101 - Chapter 12 - Part 1

This document discusses the concept of perfect competition. It defines perfect competition as a market with many small firms and buyers, no barriers to entry/exit, access to information for all participants, and identical products. Under perfect competition, firms are price takers and cannot influence the market price. The document explains that a firm will produce the quantity where marginal revenue equals marginal cost to maximize profits, and may shut down if price falls below average variable cost. It also describes how market supply and demand determine the market price and quantity in perfect competition.

Uploaded by

Asande
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 9

Perfect Competition

Chapter 12
Main ideas
After studying this chapter, you will be able to:
• Define perfect competition
• Explain how a firm makes its output decision and why it sometimes shuts
down temporarily and lays off its workers
• Explain how price and output are determined in a perfectly competitive
market
• Explain why firms enter and leave a competitive market and the
consequences of entry and exit
• Predict the effects of a change in demand and of a technological advance
• Explain why perfect competition is efficient

2 Economics 2ed: Global and Southern African Perspectives © 2013


What Is Perfect Competition?
Perfect competition is a market in which:
• Many firms sell identical products to many buyers
• There are no restrictions on entry into or exit from the market
• Established firms have no advantage over new ones
• Sellers and buyers are well informed about prices
How Perfect Competition Arises
• Perfect competition arises if the minimum efficient scale of a single producer
is small relative to the market demand for the good or service
Price Takers
• A price taker is a firm that cannot influence the market price because its
production is an insignificant part of the total market
Economic Profit and Revenue
• A firm’s total revenue equals the price of its output multiplied by the
number of units of output sold
• Marginal revenue is the change in total revenue that results from a one-unit
increase in the quantity sold

3 Economics 2ed: Global and Southern African Perspectives © 2013


What Is Perfect Competition?
Demand for the Firm’s Product
• The firm can sell any quantity it chooses at the market price

4 Economics 2ed: Global and Southern African Perspectives © 2013


What Is Perfect Competition?
The Firm’s Decisions
• To achieve its goal, a firm must decide:
1. How to produce at minimum cost
2. What quantity to produce
3. Whether to enter or exit a market

5 Economics 2ed: Global and Southern African Perspectives © 2013


The Firm’s Output Decision
• A firm’s cost curves (total cost, average cost, and marginal cost) describe
the relationship between its output and costs
• From the firm’s cost curves and
revenue curves, we can find the
output that maximises the firm’s
economic profit

6 Economics 2ed: Global and Southern African Perspectives © 2013


The Firm’s Output Decision
Marginal Analysis and the Supply Decision
• Marginal analysis compares marginal
revenue, MR, with marginal cost, MC
• As output increases, the firm’s
marginal revenue is constant but its
marginal cost eventually increases
• If marginal revenue exceeds marginal
cost (MR > MC), then the revenue
from selling one more unit exceeds
the cost of producing it and an
increase in output increases economic
profit
• If marginal revenue is less than
marginal cost (MR < MC), then the
revenue from selling one more unit is
less than the cost of producing that
unit and a decrease in output
increases economic profit
7 Economics 2ed: Global and Southern African Perspectives © 2013
The Firm’s Output Decision
Shutdown Decision
The Shutdown Point
• A firm’s shutdown point is the
price and quantity at which it is
indifferent between producing
and shutting down
• The shutdown point occurs at the
price and the quantity at which
average variable cost is a
minimum

The Firm’s Supply Curve


• A perfectly competitive firm’s
supply curve shows how its
profit-maximising output varies
as the market price varies, other
things remaining the same
• The supply curve is derived from the firm’s marginal cost curve and average
variable cost curves

8 Economics 2ed: Global and Southern African Perspectives © 2013


The Firm’s Output Decision
• When the price exceeds minimum average variable cost, the firm maximises
profit by producing the output at which marginal cost equals price

9 Economics 2ed: Global and Southern African Perspectives © 2013

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy