Chapter 13 (1) Flashcards
PERFECT COMPETITION
is a simplified model that is rarely an exact fit w/ messy reality
–> Nonetheless tells us about how the real world works
–> It also effectively represents how well-functioning markets can deliver goods & services on a wide scale & low prices–w/ price signals determining the appropriate supply & demand, and without the government ever stepping in
Powerful assumption
that firms are operating in competitive markets
Wants: to maximize profits
–> participation in a competitive market, however, places some very specific constraints on their ability to achieve this goal!
COMPETITIVE MARKET
is one in which fully informed, price-taking buyers & sellers = easily trade a standardized good / service
- Buyers & sellers are fully informed price takers
They can’t affect prices–the going price is the going price
- Goods are standardized
–> Many markets have some degree of competitiveness but the products of different firms = may not be of the same standard
–> Any two units of it, no matter where they are purchased, have the same features and are interchangeable
FIRMS CAN FREELY ENTER AND EXIT
New firms can be created & begin producing goods and services, and existing firms can decide to shut down
- ->the extent to which firms can freely enter & exit explains some differences among markets
- It can be quite difficult considering firms do not have the same capital & resources, etc.
free entry INTO a market keeps existing firms on their toes
–> It can help drive innovation, cost-cutting, and quality improvements–as firms respond to the entry of new competitors
–> In theory, free entry & exit = NOT an essential condition for a competitive market
–> but in practice the threat of collusion (businesses get together and fraudulently prevents other businesses from being to compete in the open market–cooperate for mutual benefits)
–> Means that markets tend not to stay competitive when this condition = not present
REVENUES IN A PERFECTLY COMPETITIVE MARKET
In a perfectly competitive market, producers are able to sell as much as they want without affecting the market price.
–>Follows that 2 assumption: price taker & standardized goods
- —> Therefore, means that when firms = make decisions about the quantity they will produce
- -> they don’t have to worry about whether their actions will cause the market price to rise or fall, or whether they will find buyers
–>We can assume that firms in a competitive market = be able to sell any quantity of output at the market place
Calculations (affects):
Price remains the same regardless of the quantity that the firm produces –> because the firm is a price taker in a competitive market
Total revenue EQ
price x quantity produced
Average revenue
total revenue / quantity
Marginal revenue
the change in revenue.
>simply the market price
P (Market price) = ?
Notice that P = MR = AR
