What Is a Competitive Market?

What Is a Competitive Market?

The Meaning of Competition

1. Definition of competitive market: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
2. There are four characteristics of a competitive market (sometimes called a perfectly competitive market).
a. There are many buyers and sellers.
b. The goods offered by the sellers are the same.
c. Firms can freely enter or exit the market.
d.         Every firm has a small market share.

Besides;
Every firm is a price taker i.e. a single firm can not change market price.
Buyers and seller have complete information about the product .

The Revenue of a Competitive Firm
1. Total revenue from the sale of output is equal to price times quantity.



2. Definition of average revenue: total revenue divided by the quantity sold.

3. Definition of marginal revenue: the change in total revenue from an additional unit sold.

Profit Maximization and the Competitive Firm's Supply Curve
A. A Simple Example of Profit Maximization:  

Q Total Revenue Total Cost Profit Marginal Revenue Marginal Cost Change in Profit
0 $0 $3 $-3 ---- ---- ----
1 6 5 1 $6 $2 $4
2 12 8 4 6 3 3
3 18 12 6 6 4 2
4 24 17 7 6 5 1
5 30 23 7 6 6 0
6 36 30 6 6 7 -1
7 42 38 4 6 8 -2
8 48 47 1 6 9 -3



In this example, profit is maximized if the farm produces four or five gallons of milk (see the fourth column).
The profit-maximizing quantity can also be found by comparing marginal revenue and marginal cost.
As long as marginal revenue exceeds marginal cost, increasing output will raise profit.
If marginal revenue is less than marginal cost, the firm can increase profit by decreasing output.
Profit-maximization occurs where marginal revenue is equal to marginal cost.
Example
TC=Q^3-5 Q^2+ 60Q           P=AR=MR=60
MC=3Q^2-10 Q+60
AC=Q^2- 5Q+60
Optimal output level is given by MR = MC;
3Q^2-10 Q+60=60,       3Q^2-10 Q=0,             Q* =3.33... [continues]

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