Lecture on Perfect Competition.

Lecture on Perfect Competition.
A perfectly competitive market is characterized by:

· many buyers and sellers,

· identical (also known as homogeneous) products,

· no barriers to either entry or exit, and

· buyers and sellers have perfect information.

In particular, there are so many buyers and sellers for the product in a perfectly competitive market that each buyer and seller is a price taker.

Demand curve facing a single firm
The diagram below illustrates the relationship between the market and an individual firm. The equilibrium price is determined by the interaction of market demand and market supply. Since the output of each firm is such an infinitesimally small share of this total output, no individual firm can affect the market price. Thus, each firm faces a demand curve for its product that is perfectly elastic at the market price.

Profit maximization
As discussed last week, a firm maximizes its profits by producing the level of output at which marginal revenue equals marginal cost. (If you’re not comfortable with the concepts of marginal revenue and marginal cost, it would be useful to review last week’s material.) As noted in the module accompanying Chapter 9, marginal revenue is defined as:

In a similar manner, marginal cost is defined as:

As noted last week, marginal revenue equals the market price for a firm facing a perfectly elastic demand curve. The diagram below illustrates this relationship.

Marginal and average total cost curves have been added to the diagram below. As this diagram indicates, a profit-maximizing firm will produce at the level of output (Qo) at which MR = MC. The price, Po, is determined by the firm’s demand curve.Discussion question – Why do producers hate perfect competition?

The discussion must be 500-600 words. The question must be answered with the given sources.

Sources:
1) https://www.youtube.com/watch?list=PL1B03A3CAE87226BB&v=ivBLIlhag5w
2) https://www.youtube.com/watch?list=PL1B03A3CAE87226BB&v=krUu_u63MiA
3) https://www.youtube.com/watch?list=PL1B03A3CAE87226BB&v=_-OWuxR0-V8
4) https://www.youtube.com/watch?v=wnmhUpx63kE

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