Types of Market and Pure Competition

1. many many sellers (large number of sellers)

2. homogenous/identical product

3. individual firm has no control on price (firm is a price-taker)

4. entry of new firms is easy (not blocked)

what are the characteristics of pure competition?

total revenue (TR)

TR = P * Q

total amount of money a firm makes from the sale of its output

marginal revenue (MR)

MR = ∆TR / ∆Q

extra revenue received by a firm by producing an additional unit of output

average revenue (AR)

AR = TR / Q

revenue per unit of output, represents the D faced by a firm

(revenue schedule) TR

as the Q or output increases, ___ of the firm also increases

upward sloping and linear

what is the curve’s shape of TR?

(revenue schedule) MR and AR

fixed for purely competitive firm and is equal to the price in the market

both are horizontal curves and are independent of the output produced by a firm; since AR is fixed, the D faced by purely competitive is perfectly elastic

what are the curve shapes of AR and MR?

maximize profit; when profit is negative it means the firm has a loss => minimize loss

what is the firm’s goal?

profit = TR - TC

what does Profit equal to?

1. profit ≥ -TFC

2. TR ≥TVC

3. P ≥ min AVC

firms should produce as long as one of the following conditions is satisfied:

1. all the firms in the industry are identical

2. constant cost industry

what are assumptions about the purely competitive market in the long-run?

enter or exit the market depending on whether the industry is profitable or not

what decisions do purely competitive firms make in the long-run and how?

allocative efficiency; P = MC

using the resources in their best possible way

productive efficiency

producing the goods in a least-cost way

price discrimination

charging a different price to different consumers based on their willingness to pay

overall efficiency (TS = CS + PS)

efficiency is maximized and the efficiency is lossed

under-allocation

if a current production, P > MC

over-allocation

if a current production, P < MC