4. The Theory of the Firm under Perfect Competition
The chapter delves into the profit maximization behavior of firms operating in a perfectly competitive market. It explores how firms determine their output levels based on market prices, highlighting features such as price-taking behavior, revenue generation, and the firm's supply curve. Additionally, it emphasizes the conditions necessary for achieving maximum profits and describes how various factors affect both individual firm supply curves and the overall market supply curve.
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What we have learnt
- Perfect competition is characterized by numerous buyers and sellers, homogeneous products, free entry and exit, and perfect information.
- In a perfectly competitive market, a firm maximizes profit when the price equals marginal cost, and it must cover its average variable cost in the short run and average cost in the long run.
- Technological progress and changes in input prices significantly influence a firm's supply curve, while factors like the imposition of unit taxes shift the supply curve to the left.
Key Concepts
- -- Perfect Competition
- A market structure where numerous small firms produce homogenous products, and no single firm can influence market prices.
- -- Price Taker
- A firm that accepts the market price as given and cannot influence this price through its level of output.
- -- Marginal Revenue
- The additional revenue gained from selling one more unit of a good; in perfectly competitive markets, it equals the market price.
- -- Supply Curve
- A graphical representation showing the quantity of a good that suppliers are willing to sell at different prices.
- -- Normal Profit
- The minimum level of profit necessary for a firm to remain in business, equating to the opportunity cost of entrepreneurship.
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