CAS EC 101 Study Guide - Final Guide: Sunk Costs, Marginal Cost, Market Power
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CAS EC 101 Full Course Notes
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Characteristics of perfect competition: many buyers and many sellers, the goods offered for sale are largely the same, firms can freely enter or exit the market. Because of 1 & 2, each buyer and seller is a price taker takes the price as given. Total revenue (tr) = p x q. Average revenue (ar) = tr / q = p. Marginal revenue (mr) = change in tr / change in q. Mr = p for a competitive firm. The change in tr from selling one more unit. A competitive firm can keep increasing its output without affecting the market price. So, each one-unit increase in q cause revenues to rise by p (mr = p) If increase q by one unit revenue rises by mr cost rises by mc. Rule: mr = mc at the profit-maximizing q. If mr > mc , then increase q to raise profit. If mr < mc , the reduce q to raise profit.