Economics 1021A/B Lecture 12: Chapter 12 - Perfect Competition
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ECON 1021A/B Full Course Notes
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In perfect competition, each firm is a price taker. A price taker is a firm that cannot influence the price of a good or service. No single firm can influence the price it (cid:373)ust (cid:862)take(cid:863) the e(cid:395)uili(cid:271)(cid:396)iu(cid:373) (cid:373)a(cid:396)ket price. Ea(cid:272)h fi(cid:396)(cid:373)"s output is a perfect substitute for the output of the other firms, so the de(cid:373)a(cid:374)d fo(cid:396) ea(cid:272)h fi(cid:396)(cid:373)"s output is perfectly elastic. The goal of each firm is to maximize economic profit, which equals total revenue minus total cost. Total cost is the opportunity cost of production, which includes normal profit. A fi(cid:396)(cid:373)"s total revenue equals price, p, multiplied by quantity sold, q, or p q. A fi(cid:396)(cid:373)"s marginal revenue is the change in total revenue that results from a one- unit increase in the quantity sold. Figu(cid:396)e (cid:1005)(cid:1006). (cid:1005) illust(cid:396)ates a fi(cid:396)(cid:373)"s (cid:396)e(cid:448)e(cid:374)ue (cid:272)o(cid:374)(cid:272)epts. Part (a) shows that market demand and market supply determine the market price that the firm must take.