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PERFECT COMPETITION IN THE SHORT RUN

PERFECT COMPETITION IN THE SHORT RUN. Microeconomics Made Easy by William Yacovissi Mansfield University William Yacovissi All Rights Reserved. TOTAL & MARGINAL REVENUE. Profit is the difference between total revenue and total cost.

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PERFECT COMPETITION IN THE SHORT RUN

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  1. PERFECT COMPETITION IN THE SHORT RUN Microeconomics Made Easy by William Yacovissi Mansfield University William Yacovissi All Rights Reserved

  2. TOTAL & MARGINAL REVENUE • Profit is the difference between total revenue and total cost. • Total revenue is the price of the product times the number of units sold. • Marginal revenue is the change in total revenue if one more unit is sold

  3. TOTAL & MARGINAL REVENUE • If a firm faces intense competition, it is basically forced to sell the product at the prevailing market price. • Because these companies are small relative to the market, they generally can sell all that they produce at the prevailing market price.

  4. TOTAL & MARGINAL REVENUE • Think midwestern wheat farmers. The market determines the price of wheat. The farmer can sell the whole crop at the market price. • Whether the farmer planted 2,000 acres or 4,000 acres is irrelevant. The whole crop will still be sold at the market price.

  5. TOTAL & MARGINAL REVENUE • For a firm in a competitive market, the marginal revenue is simply the price of the product and is constant over the feasible range of production.

  6. PROFIT MAXIMIZATION • What a company is looking for is the level of production that generates the largest gap between total revenue and total cost • It turns out that the level of production at which marginal revenue equals marginal cost generates the largest profits. • For a competitive firm P = MR so for a competitive firm profit is maximized when P = MC

  7. FIRM EQUILIBRIUM • The Problem facing a competitive firm is illustrated on the following graph. • The firm compares the prevailing market price to its marginal cost curve to determine the profit maximizing level of production • Profit per unit is the difference between the price and the average cost.

  8. FIRM EQUILIBRIUM

  9. FIRM EQUILIBRIUM • One important point form the diagram above is the finding that the firm should adjust output whenever market price changes. • When market price increases, production should increase and when market price falls, production should be decreased.

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