Econ4DM F15 Ch8 Part2 - Ch.8 Part 2 Perfect Competition 8.0...

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Ch.8 Part 2: Perfect Competition8.0 A Continuum of Market Structures8.1Perfectly Competitive Markets8.4Choosing Output in the Short Run8.5The Competitive Firm’s Short-Run Supply Curve8.6The Short-Run Market Supply Curve2.2 The Market Mechanism2.3 Changes in Market Equilibrium8.7Choosing Output in the Long Run1
A Continuum of Market Structures:CompetitionPure Competition assumes:1.a very large number of buyers and sellers2.homogeneous product (standardized)3.complete knowledge of all relevant market information4.free entry and exit (no barriers)These assumptions imply several things about competitive markets, including price equals marginal cost. 2
A Continuum of Market Structures:MonopolyMonopoly assumes:1.Only one firm in the market area2.Low cross price elasticity with other products.3.No interdependence with other competitors.4.Substantial entry barriersThese assumptions imply several things about monopolies, including that the monopoly price is well above marginal cost. Monopoly is discussed in Chapter 10.3
A Continuum of Market Structures:Monopolistic CompetitionMonopolistic competition assumes:1.A large number of firms, some of which may be dominant in size2.Differentiated products3.Independent decision making by individual firms4.Easy entry and exitThese assumptions imply several things about monopolistic competition, including that the price in the long run is equal to average cost. Monopolistic competition is discussed in Chapter 12. 4
A Continuum of Market Structures:OligopolyOligopoly assumes:1.Only a few firms in the market area2.Products may be differentiated or undifferentiated3.There is a large degree of interdependence with other competitorsChapter 12 discusses oligopoly markets. 5
PERFECTLY COMPETITIVE MARKETS8.1The model of perfect competition rests on three basic assumptions:(1) price taking,(2) product homogeneity, and (3) free entry and exit.Price TakingBecause each individual firm sells a sufficiently small proportion of total market output, its decisions have no impact on market price.price taker Firm that has no influence over market price and thus takes the price as given.Product HomogeneityWhenthe products of all of the firms in a market are perfectly substitutable with one another—that is, when they arehomogeneousno firm can raise the price of its product above the price of other firms without losing most or all of its business.6
PERFECTLY COMPETITIVE MARKETS8.1Free Entry and Exitfree entry (orexit) Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.When Is a Market Highly Competitive?Because firms can implicitly or explicitly collude in setting prices, the presence of many firms is not sufficient for an industry to approximate perfect competition.

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