CHAPTER Ten notes - Pure Competition CHAPTER TEN PURE...

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Pure Competition CHAPTER TEN PURE COMPETITION LECTURE NOTES I. Four market models will be addressed in Chapters 10-25; characteristics of the models are summarized in Table 10-1. 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 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. 5. Pure competition is rare in the real world, but the model is important. a. The model helps analyze industries with characteristics similar to pure competition. b. The model provides a context in which to apply revenue and cost concepts developed in previous chapters. c. Pure competition provides a norm or standard against which to compare and evaluate the efficiency of the real world. B. There are four major objectives to analyzing pure competition. 1. To examine demand from the seller’s viewpoint 2. To see how a competitive producer responds to market price in the short run 3. To explore the nature of long-run adjustments in a competitive industry 4. To evaluate the efficiency of competitive industries III. Demand from the Viewpoint of a Competitive Seller A. The individual firm will view its demand as perfectly elastic. 1. Table 10-2 and Figures 10-1 and 10-7a illustrate this. 2. The demand curve is not perfectly elastic for the industry: It only appears that way to the individual firm, since it must take the market price no matter what quantity it produces. 3. Note from Figure 10-1 that a perfectly elastic demand curve is a horizontal line at the price. B. Definitions of average, total, and marginal revenue. 57
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Pure Competition 1. Average revenue is the price per unit for each firm in pure competition. 2. Total revenue is the price multiplied by the quantity sold. 3. Marginal revenue is the change in total revenue and will also equal the unit price in conditions of pure competition. (Key Question 3) IV. Profit Maximization in the Short Run: Two Approaches A. In the short run the firm has a fixed plant and maximizes profits or minimizes losses by adjusting output; profits are defined as the difference between total costs and total revenue.
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