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CHAPTER TWENTY-THREE PURE COMPETITION INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. List the four basic market models and characteristics of each. 2. Describe characteristics of a purely competitive industry. 3. Explain how a purely competitive firm views demand for its product and marginal revenue from each additional unit sale. 4. Compute average, total, and marginal revenue when given a demand schedule for a purely competitive firm. 5. Use both total-revenue—total-cost and marginal-revenue—marginal-cost approaches to determine short-run price and output which maximizes profits (or minimizes losses) for a competitive firm. 6. Find the short-run supply curve when given short-run cost schedules for a competitive firm. 7. Explain how to construct an industry short-run supply curve from information on single competitive firms in the industry. 8. Explain the long-run equilibrium position for a competitive firm using entry and exit of firms to explain adjustments from nonequilibrium positions. 9. Explain shape of long-run industry supply curves in constant-cost and increasing-cost industries. 10. 1Differentiate between productive and allocative efficiency. 11. Explain why allocative efficiency and productive efficiency are achieved where P = minimum AC = MC. 12. Identify four possible deterrents to allocative efficiency in a purely competitive system. 13. Define and identify terms and concepts listed at the end of the chapter. LECTURE NOTES I. Four market models will be addressed in Chapters 23-25; Characteristics of the models are summarized in Table 23-1. A. Pure competition entails a large number of firms, standardized product, and easy entry (or exit) by new (or existing) firms. B. At the opposite extreme, pure monopoly has one firm that is the sole seller of a product or service with no close substitutes; entry is blocked for other firms. C. Monopolistic competition is close to pure competition, except that the product is differentiated among sellers rather than standardized and there are fewer firms. D. An oligopoly is an industry in which only a few firms exist, so each is affected by the price-output decisions of its rivals. II. Pure Competition: Characteristics and Occurrence 289
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Pure Competition A. The characteristics of pure competition : 1. Many sellers means that there are enough so that a single seller has no impact on price by its decisions alone. 2. The products in a purely competitive market are homogeneous or standardized; each seller’s product is identical to its competitor’s. 3. Individual firms must accept the market price; they are price takers and can exert no influence on price. 4. Freedom of entry and exit means that there are no significant obstacles preventing firms from entering or leaving the industry.
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