Lecture9

• Perfect competition


  One of the four basic market structures
• Characteristics of a perfectly competitive market

  • Many consumers (buyers) and firms (sellers), each "small" relative to the market
  • All firms produce a homogeneous (identical/standardized) good
  • Consumers and firms have "perfect information"
  • No obstacles prevent firms from entering or leaving the market: There are no barriers to entry and no barriers to exit
• Price takers


  Firms in a perfectly competitive market cannot influence the market price
• All firms in a perfectly competitive market charge the same price, i.e., the market price
• Firms in a perfectly competitive market can only adjust output quantity
• Possible examples of perfectly competitive markets

  • Commodity markets (e.g., agricultural products)
  • Unskilled labor markets
  • Stock markets
• Marginal revenue (MR)


  The change in total revenue that arises when an additional unit of output is supplied
• Profit-maximizing quantity of output

  The quantity at which price equals marginal cost: P = MC
• If a firm increases advertising

  Demand curve shifts right, increasing the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• Total utility is the sum of marginal utility for each unit
• The optimal output for a firm in perfect competition is where marginal revenue equals marginal cost: MR = MC