Lecture 9: Firms in Competitive Markets

What are the characteristics of perfect competition?

The characteristics of perfect competition:

1. There are many buyers and many sellers

2. The goods offered for sale are the same

3. Firms can freely enter or exit the market

In a perfectly competitive market, since goods are the same and so many participants, buyers and sellers are price takers

Total Revenue Formula

TR = P X Q

• Total Revenue= Price x Quantity

Average Revenue Formula

AR= (TR/Q) = P

• Average Revenue= (Total Revenue/ Quantity) = Price

Marginal Revenue Formula

MR = Change in TR/ Change in Q

• The change in total revenue from selling one more unit

What can a competitive firm do in terms of output?

A competitive firm can keep increasing it’s output without affecting the market price

• Increase in Q, causes revenue to rise by P

• So MR= P

What is true for firms in competitive markets?

MR= P

• When the firm sells one more unit, total revenue increases by exactly the market price.

• So the marginal revenue from selling one more unit equals the price.

What happens when you increase Q by 1 unit in a perfectly competitive market?

If Q is increased by 1 unit, revenue increases by MR and cost increases by MC

What does it mean and what should you do when MR > MC?

When MR> MC, this means that the the change in total revenue from producing 1 more unit is greater than the change in the total cost of producing 1 more unit.

• So should increase Q to raise profits

What does it mean and what should you do when MC > MR?

When MC is greater than MR, the change in total cost from producing 1 more unit is greater than the change in marginal revenue from producing 1 more unit

• So you should decrease Q to raise profit

What is true at the profit maximizing Q?

MR= MC at the profit maximizing Q

Why is the MC curve the firm’s