Week 6 - Perfect competition Flashcards
What helps determine the output level firms want to produce to maximise their profit?
determines what market they are in
What are the 5 assumptions of perfect competition?
- the market has many buyers and many sellers
- Homogeneity of output (firms produce identical production)
a) The multiplicity of sellers of identical goods means that no one firm has the power to determine the price, so firms are PRICE TAKERS - No barriers to entry or exit
- Perfect information and low transaction cost
- Perfect competition is the benchmark of Efficiency
What can perfect competition not change in the short run?
the amount of capital employed (and also the number of firms) because it is fixed
What is the profit equation?
Profit = Total Revenue - Total Cost
TR = p x q
TC = c(q)
What does the profit maximisation curve look like?
A n curve
What is the average revenue equation?
AR = Total revenue / quantity sold = Price
What is marginal revenue?
the additional revenue from selling one additional unit of output
What is the marginal revenue equation?
the rate of change of total revenue with respect to quantity sold
MR = d TR / d q
which then equals the price (only true in perfect competiton)
Eg Suppose the price is given at 20 so TR = 20q
What is the AR?
What is the MR?
AR = 20
MR = d TR/ d q
MR = 20
How does a firm maximise profit?
they cant control price, can only control output q
so they compare at marginal benefit and marginal cost
produce until the marginal benefit = marginal cost (when profit is maximised)
marginal benefit is the marginal revenue, so will choose an output where the marginal revenue they get is the same as the marginal cost
marginal revenue in perfect competition is also the price
so choose an output level when the price is the same as the marginal cost
P = MC
What curves are on a perfect competition graph?
MC (nike tick)
AC (U curve)
MR=P straight line
Where is the profit maximising output level on the graph?
P=MR=MC
What is the intersection between MR and MC?
output level
What is the cost of each unit on the graph at the MR=MC output level?
q where MC=MR up to the AC curve
(how much to produce)
What is the revenue from selling each unit on the graph?
where MR=P horizontal line