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OU ECON 1123 - Supply in Purely Competitive Markets

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ECON 1123 1st Edition Lecture 12Outline From Previous Lecture I. More on CostsII. Looking at the Long runOutline of Current Lecture I. Supply in Purely Competitive MarketsA) The Characteristics of Pure competition B) The Purely Competitive firm in short-run equilibriumC) The competitive firm’s marginal revenue scheduleD) Short Run Profits and Average Total CostsCurrent Lecture NotesI. Supply in Purely Competitive Markets (Note: This does not exist in reality)A) The Characteristics of Pure competition - In Competitive markets we have large numbers of independently action buyers and sellers. So many, in fact, that no individual buyer or seller can really affect market price- Homogeneous Products (No real or imagined differences) i.e. it’s all asprin-Firms can easily enter or exit the industry-Perfect information concerning prices and products-Perfectly mobile resourcesB) The Purely Competitive firm in short-run equilibrium- short run: some resources are fixed (capital) but some are variable (labor)-Operational objective of the owners and managers: maximize profits or minimize losses-rule for profit maximization or loss minimization- marginal revenue = marginal cost- Marginal Revenue is the additional revenue a firm receives when it sells an incrementalunit of output. MR= change in total revenue/ change in outputThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-Marginal Cost- the additional cost a firm incurs when it produces an incremental unit of outputThe Rule- MR=MCIf a company can make something for 8 dollars and sell it for 10, for a profit of 2 dollars they will do it. If a company can make something for 9.99 and sell it for 10 dollars then they alsowill do that. They will do this until no more profit can be made, then they will stop because theywant to avoid loss. C) The competitive firm’s marginal revenue scheduleNote: A firm is a price taker, they have to take the price given by the market. A firms demand will be perfectly elastic (meaning a horizontal line) for an individual firmHow Large are the firms profits (or losses)? ->average total cost=TC/q= Total cost/ firms outputE) Short Run Profits and Average Total CostsEconomic Profit=Total Revenue (TR) <minus> Total Cost (TC) TR= Revenue per unit x number of units (q)=price per unit=MR=rectangular area – OpaqTotal Cost= Total Cost per unit x number of units = average total cost x number of unitsTC= qaPOIf TR=TC they will have the exact same rectangle and that means 0 economic profitZero economic profit does not equal zero accounting profit. Recall: Total economic costs= Explicit (Accounting) CostsOpportunity (implicit) costs= how much the firms capital and entrepreneurial talent could have earned if employed in an alternative line of productionZero econ profit-> positive accounting profitsAccounting profits would be just high enough to keep capital and entrepreneurialtalent in this line of


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