Overview
This lesson covers the concepts of market power, the features of perfectly competitive markets, how individual firms relate to the industry, key revenue formulas, and the profit-maximizing rule in perfect competition.
Market Power in Perfect Competition
- Market power does not exist in perfectly competitive markets because firms are price takers, not price makers.
- Individual firms cannot influence prices; they are too small relative to the entire market.
The JSE and Perfect Competition
- The Johannesburg Stock Exchange (JSE) is an example of a perfectly competitive market.
- Shares are homogeneous (identical), and prices are set by demand and supply, not by individual buyers or sellers.
Industry vs. Individual Firm
- The industry includes all individual firms producing the same product (e.g., all maize farmers).
- An individual firm is just one of many in the industry.
Revenue Calculations in Perfect Competition
- Price (P): Stays constant as firms are price takers.
- Total Revenue (TR): TR = Price × Quantity.
- Average Revenue (AR): AR = Total Revenue ÷ Quantity; in perfect competition, AR equals Price.
- Marginal Revenue (MR): MR = Change in Total Revenue ÷ Change in Quantity; in perfect competition, MR also equals Price.
Demand Curves: Firm vs. Industry
- The industry demand and supply curves determine the market price and quantity.
- The individual firm faces a horizontal (perfectly elastic) demand curve at the market price.
The Profit-Maximizing Rule
- A firm maximizes profit by producing at the quantity where Marginal Revenue (MR) equals Marginal Cost (MC).
- This point is called the profit-maximizing point.
Key Terms & Definitions
- Price Taker — A firm that must accept the market price; it cannot set its own price.
- Homogeneous Product — Products that are identical, with no differentiation.
- Total Revenue (TR) — The total income from sales (TR = P × Q).
- Average Revenue (AR) — Revenue per unit sold (AR = TR ÷ Q); equals price in perfect competition.
- Marginal Revenue (MR) — Additional revenue from selling one more unit (MR = change in TR ÷ change in Q).
- Marginal Cost (MC) — Additional cost from producing one more unit.
- Profit-Maximizing Point — Where MR = MC; the output level for maximum profit.
Action Items / Next Steps
- Answer the homework:
- How is the market price determined in a perfectly competitive market?
- Why wouldn’t a perfectly competitive firm charge more than the market price?
- Explain the difference between the demand curve for the industry and the individual firm.
- Review the next lesson (Lesson 52) for answers and further explanation.