ECO 1304 Chapter Notes - Chapter 8: Market Power, Marginal Revenue, Perfect Competition

• School: University of Ottawa
• Department: Economics
• Course: ECO 1304
• Professor: Lawrence Harris

Document Summary

Perfect competition is a market with many buyers and sellers, all selling a homogeneous product. Market entry and exit is easy, and no firm can affect the market price. A perfectly competitive firm is called a price taker. A price taker takes the price given by the intersection of the market demand and market supply (cid:272)urves. This is (cid:271)e(cid:272)ause the fir(cid:373)"s i(cid:374)flue(cid:374)(cid:272)e o(cid:374) pri(cid:272)e is i(cid:374)sig(cid:374)ifi(cid:272)a(cid:374)t. This means that consumers believe that the fir(cid:373)s" produ(cid:272)ts are perfe(cid:272)t su(cid:271)stitutes for ea(cid:272)h other. At a higher price, potential buyers would simply buy from competitors; demand is perfectly elastic at the market price. Total revenue (tr) is the revenue that the firm receives from the sale of its products. (tr = p x q) Average revenue (ar) equals total revenue divided by the number of units sold. Marginal revenue (mr) is the additional revenue from the sale of one more unit.