ECON 101 Chapter 6

• In a perfectly competitive market, the market is not controlled by one person or firm as there is a large number of firms
• In a perfectly competitive market, there are many functionally identical products

  • Ex. Wheat made by different farmers
• In a perfectly competitive market, there is free entry & exit
• Total Revenue = Price x Quantity
• Total Revenue increases at a constant rate with the increase in Quantity
• Average Revenue = Total Revenue / Quantity
• Marginal Revenue = ∆ Total Revenue / ∆ Quantity
• In a competitive market only

  • Price = Average Revenue = Marginal Revenue
• Marginal Revenue = Price
• Profit = Total Revenue - Total Cost
• If Marginal Cost > Marginal Revenue, cut back production, lay off workers
• If Marginal Revenue > Marginal Cost, increase production, hire workers
• If Marginal Revenue = Marginal Cost, the firm is maximizing their profit
• If Price > Average Total Cost, there is Profit - produce at Price = Marginal Cost to Maximize profit
• If Average Total Cost is > Price > Average Variable Cost, there is a Loss - produce at Price = Marginal Cost to minimize loss by producing
• If Average Total Cost is > Average Variable Cost > Price, There is a Loss & should shut down - do not produce, minimize loss by NOT producing
• Average Revenue is Revenue from a typical unit
• Marginal Revenue is Revenue from an additional unit
• If the marginal cost exceeds marginal revenue, the firm should lower the level of production to maximize profit
• For a competitive firm Average revenue, Marginal revenue, and the price of the goods are all equal.
• When marginal revenue equals marginal cost, the firm may be minimizing its losses
• A profit-maximizing firm will shut down in the short run when the price is less than the average variable cost
• In the long run, a profit-maximizing firm will choose to exit a market when Total revenue is less than the total cost
• A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less than its Variable costs
• When new firms enter a perfectly competitive market The short-run market supply curve shifts to the right
• The supply curve of a firm in a perfectly competitive market is the Marginal cost curve above the average variable cost curve
• In the long-run, Marginal Revenue = Marginal Cost
• In the long-run, there is zero economic profit

  • due to free entry & exit - other firms can flood the market
• In the long-run, Price = Average Revenue = Marginal Revenue = Average Total Cost = Marginal Cost
• profit maximizing producers in a competitive market produce output at a point where marginal cost is increasing