ECON-1006EL Chapter Notes - Chapter 9: Average Variable Cost, Marginal Revenue, Perfect Competition
23 May 2018
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Chapter 9: Competitive Markets
Definitions
Market
Structure
All features of a market that affect the behaviour and performance of firms in that
market, such as the number and size of sellers, the extent of knowledge about one
another’s actions, the degree of freedom of entry, and the degree of product
differentiation
Market Power
The ability of a firm to influence the price of its product
Perfect
Competition
A market structure in which all firms in an industry are price takers, and in which
there is freedom of entry into and exit from the industry
Homogenous
product
In the eyes of the purchasers, every unit of the product is identical to every other unit
Price takers
A firm that can alter its output and sales without affecting the market price of its
product
Total Revenue
Total receipts from the sale of a product; price times quantity
Average
Revenue
Total revenue divided by quantities sold; this is the market price when all units are
sold at the same price
Marginal
Revenue
The change in a firm’s total revenue resulting from a change in its sales by one unit
Shut-Down
Price
The price that is equal to the minimum of a firm’s average variable costs. At prices
below this, a profit-maximizing firm will shut-down and produce no output
Short-Run
Equilibrium
For a competitive industry, the price and output at which industry demand equals
short-run industry supply, and all firms are maximizing their profits. Either profits or
losses for individual firms are possible.
Break-Even
Price
The price at which a firm is just able to cover all of its costs, including the
opportunity cost of capital
Equations
Total Revenue
Average Revenue
Marginal Revenue
Key Points
• A market is said to have a competitive structure when its firms have little or no market
power. The more market power the firms have, the less competitive is the market
structure.
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Document Summary
Market power the ability of a firm to influence the price of its product. A market structure in which all firms in an industry are price takers, and in which there is freedom of entry into and exit from the industry. In the eyes of the purchasers, every unit of the product is identical to every other unit. A firm that can alter its output and sales without affecting the market price of its product. Total revenue divided by quantities sold; this is the market price when all units are sold at the same price. The change in a firm"s total revenue resulting from a change in its sales by one unit. Total revenue total receipts from the sale of a product; price times quantity. The price that is equal to the minimum of a firm"s average variable costs. At prices below this, a profit-maximizing firm will shut-down and produce no output.
