1. SAYRE | MORRIS Seventh Edition Perfect Competition CHAPTER 8 8-1© 2012 McGraw-Hill Ryerson Limited

2. Industry a group of producers Market the interaction of both producers and consumers Perfect Competition a market in which all buyers and sellers are price takers 8-2© 2012 McGraw-Hill Ryerson Limited LO1

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4. Conditions for Perfect Competition 1.many small buyers and sellers all of whom are price takers 2.no preferences shown 3.easy entry and exit by both buyers and sellers 4.the same market information available to all 8-4© 2012 McGraw-Hill Ryerson Limited LO2

5. Conditions for a Market System 1.extensive specialization and trade, 2.perfect competition, 3.private ownership of productive resources, and 4.a legal and social foundation 8-5© 2012 McGraw-Hill Ryerson Limited LO2

6. 8-6© 2012 McGraw-Hill Ryerson Limited LO3 The Competitive Industry and Firm

7. Total Revenue total quantity sold (Q) times price (P) Average Revenue the amount of revenue received per unit sold Marginal Revenue the extra revenue derived from one more unit 8-7© 2012 McGraw-Hill Ryerson Limited LO3

8. 8-8© 2012 McGraw-Hill Ryerson Limited LO3 Given a perfectly elastic demand curve, Price  AR = MR

9. Price is $20/unit sold. AR = TR = 80 = 20 Output 4 MR = TR = 80 – 60 = 20 = 20 output 4 – 3 1 So, with perfect competition : Price = AR = MR = D The demand curve for an individual firm is a horizontal line. © McGraw Hill Publishing Co, 20111-9

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11. Total Profit the difference between total revenue and total costs: T   TR  TC A firm will maximize profit when (Total Revenue  Total Cost) is greatest. Break-even Output the level of output at which the sales revenue of the firm just covers fixed and variable costs, including normal profit 8-11© 2012 McGraw-Hill Ryerson Limited LO3 Profit and Output

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14. 8-14© 2012 McGraw-Hill Ryerson Limited LO3 Marginal Approach to Profit If MR > MC →produce more If MR < MC →produce less To maximize total profit, the firm should increase production to the point at which: MR = MC

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18. Break-even Price the price at which the firm makes only normal profits; that is, makes zero economic profits As long as the losses from production are less than total fixed costs, the firm should continue to produce Shutdown Price the price that is just sufficient to cover a firm’s variable costs 8-18© 2012 McGraw-Hill Ryerson Limited LO4 Break-even and Shutdown

19. The supply curve for a firm is that portion of its MC curve that lies above its average variable cost curve 8-19© 2012 McGraw-Hill Ryerson Limited LO5 Deriving the Supply Curve

20. In the short run the size of both the firm and the industry are fixed; In the long run, both are variable 8-20© 2012 McGraw-Hill Ryerson Limited LO6 Industry Demand and Supply

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22. Increasing Cost Industry an industry in which the prices of resources and products both rise as the industry expands Decreasing Cost Industry an industry in which the prices of resources and products both fall as the industry expands Constant Cost Industry an industry in which the prices of resources and products remain unchanged as the industry expands 8-22© 2012 McGraw-Hill Ryerson Limited LO1

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