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Lecture Economics (9/e): Chapter 13 - David C. Colander

Chapter 13 - Perfect competition. After reading this chapter, you should be able to: Explain how perfect competition serves as a reference point, explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor, determine the output and profit of a perfect competitor graphically and numerically, explain the adjustment process from short-run equilibrium to long-run equilibrium. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain how perfect competition serves as a reference point Determine the output and profit of a perfect competitor graphically and numerically Explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor Explain the adjustment process from short-run equilibrium to long-run equilibrium 2 Conditions for Perfect Competition For a market to be perfectly competitive, three conditions must be met: Both buyers and sellers are price takers – a price taker is a firm or individual who takes the price determined by market supply and demand as given There are no barriers to entry – barriers to entry are social, political, or economic impediments that prevent firms from entering a market Firms’ products are identical – this requirement means that each firm’s output is indistinguishable from any other firm’s output A perfectly competitive market is a market in which economic forces operate unimpeded 3 Profit Maximizing Level of Output Marginal revenue (MR) is the change in total revenue associated with a change in quantity A firm maximizes profit when marginal revenue equals marginal cost The goal of the firm is to maximize profits Profit – the difference between total cost and total revenue Marginal cost (MC) is the change in total cost associated with a change in quantity 4 Profit Maximizing Level of Output If MR MC, a firm can increase profit by increasing output The profit-maximizing condition of a competitive firm is: MC = MR For a competitive firm, MR = P A firm maximizes total profit, not profit per unit 5 Profit Maximization using Total Revenue and Total Cost Total cost is the cumulative sum of the marginal costs, plus the fixed costs An alternative method to determine the profit-maximizing level of output is to look at the total and total cost . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain how perfect competition serves as a reference point Determine the output and profit of a perfect competitor graphically and numerically Explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor Explain the adjustment process from short-run equilibrium to long-run equilibrium 2 Conditions for Perfect Competition For a market to be perfectly competitive, three conditions must be met: Both buyers and sellers are price takers – a price taker is a firm or individual who takes the price determined by market supply and demand as given There are no barriers to entry – barriers to entry are social, political, or economic impediments that prevent firms from entering a market Firms’ products are identical – this requirement means that each firm’s output is indistinguishable from any other firm’s output A perfectly competitive