Econ Module 6

Competitive Market

A market with a large number of buyers and sellers where goods are similar and participants have equal information.

Results of Competitive Market

In a competitive market, prices are not controlled by a single entity and there is a narrow range of prices.

Total Revenue (TR)

TR = P X Q, where P is price and Q is quantity.

Average Revenue (AR)

AR is calculated as TR / Q, and in a competitive market, AR = P.

Marginal Revenue (MR)

The revenue gained from selling one additional unit, MR = P in a competitive market.

Profit Maximization Condition

In a competitive market, profit is maximized when MR = MC.

Firm's decision to increase production

If MR > MC, the firm should increase production.

Firm's decision to decrease production

If MR < MC, the firm should decrease production.

Profit Equation

Profit is calculated as TR - TC.

Marginal Cost (MC) increase

In the context of competitive markets, as production increases, marginal cost tends to increase.

Average Total Cost (ATC) curve shape

The ATC curve is U-shaped.

Average Variable Cost (AVC) curve shape

The AVC curve is also U-shaped.

MC and ATC relationship

MC crosses ATC at the minimum point of ATC.

MC and AVC relationship

MC crosses AVC at the minimum point of AVC.

Equal Information Assumption

In a competitive market, both buyers and sellers have equal access to information.

Free Entry and Exit

Firms in a competitive market can freely enter or exit the market.

Price Range in CM

The prices in a competitive market tend to have a narrow range due to the presence of many buyers and sellers.

Characteristics of Firms in CM

All firms produce relatively similar products in a competitive market.

Total Revenue and Quantity Relationship

In a competitive market, total revenue (TR) and quantity (Q) are proportional.

Price, Average Revenue, and Marginal Revenue Equality

In a competitive market, P = AR = MR.

Maximizing Profit

A firm in a competitive market maximizes profit where MR equals MC.

Competitive Market Dynamics

In a competitive market, individual buyers and sellers have little influence over the market price.

Understanding Marginal Revenue

Marginal Revenue refers to the additional income earned from selling one more unit.

Implications of MR = MC

When MR equals MC, firms are efficiently allocating resources to maximize profit.

Shape of Cost Curves in CM

Both average total cost and average variable cost curves are U-shaped, reflecting economies and diseconomies of scale.

Competition Effect on Prices

In a competitive market, the prices tend to be driven down to a level where firms earn normal profits.