Chapter 13 - Perfect competition. After studying this chapter you will be able to understand: What the characteristics of a perfectly competitive market are? How to calculate average, marginal, and total revenue? How to find a firm’s optimal quantity of output? How to differentiate between a firm’s shut down and market exit decisions?. | Chapter 13 Perfect Competition © 2014 by McGraw-Hill Education 1 What will you learn in this chapter? • • • • • • • • What the characteristics of a perfectly competitive market are. How to calculate average, marginal, and total revenue. How to find a firm’s optimal quantity of output. How to differentiate between a firm’s shut down and market exit decisions. How to analyze a firm’s short-run supply curve for a competitive market. How to analyze a firm’s long-run supply curve for a competitive market, and what its implications are for profit-seeking firms. Why a long-run supply curve might slope upward. What the effect of a demand shift is on a market in long-run equilibrium. © 2014 by McGraw-Hill Education 2 A competitive market • This chapter analyzes how firms make production decisions in a competitive market. • The characteristics of a competitive market are: – Full information exists. – Buyers and sellers are price takers. – The good or service is standardized. – Firms freely enter and exit the market. © 2014 by McGraw-Hill Education 3 1 A competitive market • Competitive markets have so much competition that no one has the ability to affect market prices. Thus, all are price takers. • If a buyer or seller has the ability to noticeably affect market prices, that person/firm has market power. – The only seller of food on a plane can charge a very high price, knowing that some people would be hungry enough to pay it. – The only buyer of food at a market at the end of the day could offer a very low price, knowing that some seller would be willing to sell. • Most sellers and buyers are not able to set their own price, although they may have some ability to set prices. • Participation in a competitive market places very specific constraints on a firm’s ability to maximize profits. © 2014 by McGraw-Hill Education 4 Revenues in a perfectly competitive market In a perfectly competitive market, producers are able to sell as much as they want without .
