Chapter 6 - Chapter 6: Price Taking The Firm in a Purely...

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Chapter 6: Price Taking The Firm in a Purely Competitive Market
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Pure Competition 3 basic assumptions: Large number of sellers, each producing a relatively small fraction of total supply no single firm can affect price level by changing its output The firms in the industry sell identical products no product differences, products are perfect substitutes No substantial barriers to entering/leaving the industry e.g. no patent restrictions,. ..
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Pure Competition Why is that model useful? Might explain behavior of firms in industries that are close to the model (wheat farming, cattle ranching,. ..) Also: Model might serve as a benchmark case (might help to understand the reasons for problems in less competitive industries)
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The Behavior of Firms under Pure Competition Individual firm = price taker Result of 2 assumptions: Output decision of firm does not affect the market price All firms sell identical products (i.e. no firm can charge higher price w/o losing all customers) Firms must accept (take) the price dictated by the market
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The Behavior of Firms under Pure Competition NOTE: prices can change under pure competition Price changes when there is a change in industry supply/demand BUT: price never changes as a result of a change in an individual firm‘s supply
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The Behavior of Firms under Pure Competition
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Profit Maximization in the Short Run If a firm is a price taker: the only variable it controls is the quantity it produces In the short-run: produce output within the capacity of its equipment (remember: one factor is
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This note was uploaded on 04/29/2008 for the course ECON 101 taught by Professor Fels during the Spring '08 term at Wisconsin Milwaukee.

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Chapter 6 - Chapter 6: Price Taking The Firm in a Purely...

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