The Theory of the Firm Under Perfect Competition — Chapter Summary
Madhya Pradesh Board · Class 12 · Economics
Summary of The Theory of the Firm Under Perfect Competition for Madhya Pradesh Board Class 12 Economics. Perfect competition creates a market setting.
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Overview
Perfect competition creates a market setting in which a firm behaves as a price taker and decides output by comparing revenue with cost. A firm is assumed to be a ruthless profit maximiser, so output is chosen where profit is highest. The chapter connects profit maximisation, revenue concepts, suppl
Key Concepts
A perfectly competitive market has
A perfectly competitive market has a large number of buyers and sellers, homogenous products, free entry and exit, and perfect information. These feat
A price
A price-taking firm accepts the market price as given. If it charges above market price, it cannot sell anything. If it charges at or below market pri
Total revenue is the money earned
Total revenue is the money earned from sales and is given by TR = p × q, where p is market price and q is quantity sold.
Average revenue is TR per unit
Average revenue is TR per unit of output. For a price-taking firm, AR = TR/q = p.
Marginal revenue is the increase
Marginal revenue is the increase in total revenue from selling one more unit. For a perfectly competitive firm, MR = p.
Learning Objectives
- Understand the defining features of perfect competition
- Explain why a perfectly competitive firm is a price taker
- Define and use total revenue, average revenue, and marginal revenue
- Apply the rule profit is maximised where MR equals MC
- Identify the short run shut down point and the long run shut down point
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