![]() In Prefect competition every firm sells its output at a given price, and can sell as much as it likes at this price. Price elasticity depends on availability of substitutes, how much income consumers spend on the product, and the time period considered.Average and Marginal Revenue Curves Under Perfect Competition Demand can be elastic (E>1), inelastic (E<1), or unitary elastic (E=1). Price Elasticity of Demand is the % change in quantity demanded divided by % change in price. Marginal cost (MC) is the cost of producing an additional unit of output. Marginal revenue (MR) is the revenue received from an additional unit of output, or the change in total revenue divided by the change in output. Total costs equal average total costs (ATC) times output level. Total revenue is sales price times quantity sold. In the long run, economic profits go to zero because the entry of new firms increases market supply and lowers prices. Alternatively, we can say that the profit is maximized at the point where Total revenue – Total cost is maximum. ![]() In the short run, a firm maximizes its economic profit at the quantity where MC = MR. The firm will produce quantity Q where marginal cost equals marginal revenue. The marginal cost first decreases and then increases. So, the marginal revenue curve is the demand curve. Since each firm is a price taker, marginal revenue is equal to the price of the product (MR = P). Till the marginal cost becomes equal to marginal revenue the firm will continue to increase its output. A firm maximizes profit when marginal cost (MC) equals marginal revenue (MR), i.e., MC = MR. The goal of the firm is to maximize profits. The output price and output is calculated by equating the demand and supply function. ![]() However, the industry will have downward sloping demand curve. In perfect competition, each firm faces a perfectly elastic demand curve as shown below. ![]() The price is determined by the supply and demand forces. They have no influence on the price of the product. The firms in perfect competition are price takers. ![]()
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