Perfect competition in the context of "Marginal revenue"

In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing revenue. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. The size of the gap, which encapsulates the firm's level of market dominance, is determined by the residual demand curve's form. A steeper reverse demand indicates higher earnings and more dominance in the market. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.

The market power of any individual firm is controlled by multiple factors, including but not limited to, their size, the structure of the market they are involved in, and the barriers to entry for the particular market. A firm with market power has the ability to individually affect either the total quantity or price in the market. This said, market power has been seen to exert more upward pressure on prices due to effects relating to Nash equilibria and profitable deviations that can be made by raising prices. Price makers face a downward-sloping demand curve and as a result, price increases lead to a lower quantity demanded. The decrease in supply creates an economic deadweight loss (DWL) and a decline in consumer surplus. This is viewed as socially undesirable and has implications for welfare and resource allocation as larger firms with high markups negatively effect labour markets by providing lower wages. Perfectly competitive markets do not exhibit such issues as firms set prices that reflect costs, which is to the benefit of the customer. As a result, many countries have antitrust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.

A price signal is information conveyed to consumers and producers, via the prices offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded. It also provides potential business opportunities. When a certain kind of product is in shortage supply and the price rises, people will pay more attention to and produce this kind of product. The information carried by prices is an essential function in the fundamental coordination of an economic system, coordinating things such as what has to be produced, how to produce it and what resources to use in its production.

In mainstream (neoclassical) economics, under perfect competition relative prices signal to producers and consumers what production or consumption decisions will contribute to allocative efficiency. According to Friedrich Hayek, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.

In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, the unit price for a particular good or other traded item in a perfectly competitive market, will vary until it settles at the market-clearing price, where the quantity demanded equals the quantity supplied such that an economic equilibrium is achieved for price and quantity transacted. The concept of supply and demand forms the theoretical basis of modern economics.

In situations where a firm has market power, its decision on how much output to bring to market influences the market price, in violation of perfect competition. There, a more complicated model should be used; for example, an oligopoly or differentiated-product model. Likewise, where a buyer has market power, models such as monopsony will be more accurate.

In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, which is currently the mainstream approach to microeconomics, the firm is assumed to be a "rational agent" (whether operating in a perfectly competitive market or otherwise) which wants to maximize its total profit, which is the difference between its total revenue and its total cost.

Measuring the total cost and total revenue is often impractical, as the firms do not have the necessary reliable information to determine costs at all levels of production. Instead, they take more practical approach by examining how small changes in production influence revenues and costs. When a firm produces an extra unit of product, the additional revenue gained from selling it is called the marginal revenue (${\displaystyle {\text{MR}}}$), and the additional cost to produce that unit is called the marginal cost (${\displaystyle {\text{MC}}}$). When the level of output is such that the marginal revenue is equal to the marginal cost (${\displaystyle {\text{MR}}={\text{MC}}}$), then the firm's total profit is said to be maximized. If the marginal revenue is greater than the marginal cost (${\displaystyle {\text{MR}}>{\text{MC}}}$), then its total profit is not maximized, because the firm can produce additional units to earn additional profit. In other words, in this case, it is in the "rational" interest of the firm to increase its output level until its total profit is maximized. On the other hand, if the marginal revenue is less than the marginal cost (${\displaystyle {\text{MR}}<{\text{MC}}}$), then too its total profit is not maximized, because producing one unit less will reduce total cost more than total revenue gained, thus giving the firm more total profit. In this case, a "rational" firm has an incentive to reduce its output level until its total profit is maximized.

Perfect information is a concept in game theory and economics that describes a situation where all players in a game or all participants in a market have knowledge of all relevant information in the system. This is different than complete information, which implies common knowledge of each agent's utility functions, payoffs, strategies and "types". A system with perfect information may or may not have complete information.

In economics this is sometimes described as "no hidden information" and is a feature of perfect competition. In a market with perfect information all consumers and producers would have complete and instantaneous knowledge of all market prices, their own utility and cost functions.

The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.

Suggested pricing methods may conflict with competition theory, as they allow prices to be set higher than would be established by supply and demand. Resale price maintenance—fixing prices—goes further than suggesting prices, and is illegal in many countries.

In economics, industrial organization is a field that extends the theory of the firm by analyzing the structure of firms and markets, as well as the boundaries between them. It introduces real-world features that depart from the perfectly competitive model, such as transaction costs, imperfect information, and barriers to entry faced by potential competitors.

The field studies how firms and markets are organized and how they behave across a spectrum ranging from competitive markets to monopoly, including cases shaped by government intervention and regulation.