What is 4 features of a perfectly competitive market?
1. Perfectly Competitive Market Characteristics of a perfectly competitive market/industry: Numerous buyers and sellers Homogeneous products Consumers have perfect information about prices All firms, incumbent and potential entrants alike, have equal access to resources Implications of these characteristics: Price-taking firm Law of one price Free entry 2. Profit-Maximization by a Price-taking firm (1) Economic profit vs. accounting profit Accounting profit = revenue – accounting cost Economic profit = revenue – total opportunity cost (2) The profit-maximization problem Max Profit = TR(Q) – TC(Q) Marginal revenue: MR = For a price-taking firm, marginal revenue is equal to market price, MR = P. For a price-taking firm, at a profit-maximizing quantity of output, two conditions must hold: · P = MC · MC is increasing Logic: When P < MC, the firm can reduce its output by one unit and its profit will go up by MC – P; When P > MC, the firm can increase its output by one unit and its profit wi
