Competitive Markets

<aside> đź’ˇ A market is said to be competitive when its firms have little or no market power. The more market power the firms have, the less competitive is the market.

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The extreme form of competitive market structure occurs when each firms has zero market power! We call this a perfectly competitive market.

In everyday language, the term competitive behaviour refers to the degree to which individual firms actively vie with one another for business. (Ex. MasterCard and Visa)

<aside> đź’ˇ Competitive markets vs. Competitive behaviour Firms in perfectly competitive markets (e.g., the Saskatchewan and Manitoba wheat producers) do not compete actively with each other, whereas firms that do compete actively with each other (e.g., MasterCard and Visa) do not operate in perfectly competitive markets.

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The theory of perfect competition

Some assumptions

  1. All the firms sell a homogeneous product
  2. Consumers know the characteristics of the product and the prices charged by various firms.
  3. The level of each firm’s output at which its LRAC curve reaches a minimum is small relative to the industry’s total average
  4. The industry is characterized by freedom of entry and exit.

(👆🏻Imply that each firm in a perfect competitive industry is a price taker)

<aside> 💡 Even though the demand curve for the entire industry is negatively sloped, each firm in a perfectly competitive industry faces a horizontal demand curve because variations in the firm’s output have no significant effect on market price.

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Total, Average, and Marginal Revenue

Total Revenue (TR) is the total amount received by the firm from the sale of a product.

$TR = pQ$

Average Revenue (AR) is the amount of revenue per unit sold

$AR = TR/Q = (pQ)/Q = p$