Perfect competition.

Short run - supply and allocative efficiency in Perfectly competitive markets.

Business firm - an organization set up and managed for the purpose of earning profits for its owner by producing goods and services for sale in markets.

Perfect competition

• In a perfect competitive markets many firms sell a standardized product.
   

• Buyers are fully informed about the prices of the standardized product offered by these competitive firms.
   

• Each firm has only a small market share of total supply and takes the price of the product as beyond its control. It is therefore a price taker.

The demand for the output of a competitive firm.

The market price of eggs is $ 15. A competitive firm can sell all the eggs it wishes at that price. The output of any firm is a perfect substitute for that of any other firms.

The market demand curve is downward sloping because consumers will buy more eggs at a lower price.

=> the curve facing the firm, is horizontal, because the firms sales will have no effect on the price.

Profit maximization.

• Profit = Total Revenue ( TR ) - Total Cost ( TC )

The price is beyond the control of a competitive firm. Therefore a competitive firm can influence its revenue only by varying the amount it offers for sale.

• Marginal Revenue.

Is the change in revenue (∆TR) which results from a small increase of output (∆Q) => MR= ∆TR/ ∆Q

• Average Revenue (AR) - is the revenue per unit of output.

AR = PQ / Q = P

Price $	Quantity	Revenue $	MR $	AR $
6	0	0	-	-
5	1	5	5	5
4	2	8	3	4
3	3	9	1	3
2	4	8	-1	2
1	5	5	-3	1