ECO101H1 Lecture Notes - Lecture 8: Perfect Competition, Sunk Costs, Marginal Revenue

• School: UTSG
• Department: Economics
• Course: ECO101H1
• Professor: Paola Salardi

Document Summary

Characteristics of perfect competition: many buyers and sellers, the goods offered 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. Average revenue (ar) ar = tr/q = p. The change in tr from selling one more unit tr/ q. A completive firm can keep increasing output without affecting the market price. So each one- unit increase causes revenue to rise by p -> mr = p. Mr = p is only true for firms in competitive markets. Marginal cost: the increase in total cost from producing one more unit. If q increases by one, revenue rises my mr, cost rises by mc. If mr > mc, increase q to raise profit. If mr < mc, then reduce q to raise profit. At ant q with mr > mc, increasing q raises profit.