WEEK 5 MARKET STRUCTURES - PERFECT COMPETITION

Flashcards covering key terms and concepts related to perfect competition, including its characteristics, price takers, and profit maximization rules.

Perfect Competition

A market where many firms sell identical products, with many buyers and no restrictions to entry/exit.

Price Taker

Firms that are too small to influence market price; they accept the price set by supply and demand.

Profit

The difference between total revenue and total cost.

Total Revenue

Price per unit x Quantity

Total Cost

Cost per unit x Quantity

Profit Maximizing Rule

Marginal Revenue = Marginal Cost (MR = MC)

Marginal Revenue

Change in total revenue (TR2 – TR1/ Q2-Q1)

Marginal Cost

Change in total cost (TC2 – TC1/Q2-Q1)

Characteristics of Perfect Competition

Many firms, identical product, many buyers, no entry/exit restrictions, complete information.

Profit Maximizing Point

The point where Marginal Revenue equals Marginal Cost.

Price Taker (in Perfect Competition)

The market condition where individual firms have no power to control the price.

Examples of Perfect Competition

Local vegetable markets, fish markets.

Price Taker Example

Farmers supplying green long beans in Fiji.

Why firms can't influence Market Price

Because there are numerous other sellers and their individual production is insignificant relative to overall market supply.

Marginal Revenue equals Marginal Cost

Occurs when the additional revenue gained from selling one more unit equals the additional cost of producing that unit

Marginal Revenue

The additional revenue gained by selling one more unit of a good or service

Marginal Cost

The additional cost incurred by producing one more unit of good or service

Perfect Competition

A market structure in which a single seller or producer assumes a principal position in the market and controls the supply or prices of goods and services

Market Power

The ability of a firm to influence the price of its product by changing the quantity it produces or offers for sale

Pure competition

Market situation in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price is beyond the control of individual buyers and sellers