9.2 The Theory of Perfect Competition Flashcards
what are the Assumptions of Perfect Competition?
1-All firms sell a homogeneous product
2-perfect information on quality and price
3-The level of each firm’s output at which its long-run average cost reaches a minimum is small relative to the industry’s total output (small firms)
4-The industry is characterized by
freedom of entry and exit
5- No transaction cost
Why is Demand Curve for a Perfectly
Competitive Firm is horizontal?
The horizontal demand curve indicates, rather, that any realistic variations in that firm’s production will leave the price unchanged because the effect on total industry output will be negligible
Why are Small Firms Price Takers?
1-Products have negatively sloped market demand curves
2-increase in industry’s output (caused by an increase in supply) will cause some fall in the marketplace
3-any increase that one firm could make in its output has such a negligible effect on the industry’s price, that it can be ignored
4-individual firms are price takers and have horizontal demand curves
What is total revenue?
Total revenue is the total amount received by the firm from the sale of a product
TR= p * Q
What is average revenue?
Average revenue is the amount of revenue per unit sold
AR =(p * Q)/Q = p
What is marginal revenue?
Marginal revenue is the change in a firm’s total revenue resulting from a change in its sales by one unit
MR = TR/Q = p
What is the market price for a competitive price-taking firm?
For a competitive price-taking firm, the market price is the firm’s marginal (and average) revenue
