Pure Competition
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Pure Competition
Market Structure Continuum
Pure Competition
Pure Monopoly
Monopolistic Competition Oligopoly
FOUR MARKET MODELS
Pure Competition:
• Very Large Numbers • Standardized Product • “Price Takers” • Free Entry and Exit
The Revenue of a Competitive Firm
The Revenue of a Competitive Firm
• Average revenue tells us how much revenue a firm receives for the typical unit sold.
• Average revenue is total revenue divided by the quantity sold.
The Revenue of a Competitive Firm In perfect competition, average revenue equals the price of the good.
The Revenue of a Competitive Firm
Total, Average, and Marginal Revenue for a Competitive Firm
Copyright©2004 South-Western
Firm Demand in Perfect Competition
MR DARP: MR = D = AR = P
* The demand curve for a perfectly competitive firm is perfectly elastic (horizontal)
Profit = (P-ATC) x q
The Firm’s Short-Run Decision to Shut Down
• A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions.
• Exit refers to a long-run decision to leave the market.
The Firm’s Short-Run Decision to Shut Down
• The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down.
– Sunk costs are costs that have already been committed and cannot be recovered.
The Competitive Firm’s Short Run Supply Curve
Copyright © 2004 South-Western
MC
Quantity
ATC
AVC
0
Costs
Firm shuts down if P < AVC
Firm ’ s short-run supply curve
If P > AVC, firm will continue to produce in the short run.
If P > ATC, the firm will continue to produce at a profit.
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