Chapter%209 - Econ 160, Vardanyan Chapter 9 Perfect...

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Econ 160, Vardanyan 1 Chapter 9 Perfect Competition Economist separate markets in four distinctively different types, one of which, called a perfectly competitive market, will be the focus of this chapter. In simple terms, a perfectly competitive market is defined as a market with hundreds of sellers and buyers of a standardized good. Because each firm is small relative to the total size of the market, it cannot affect the market price, so it is taken as given. (For example, if the firm increases its price then it will lose all of its customers.) Also, there are no barriers to enter the market (i.e. no need to buy sophisticated and expensive equipment.) To summarize, a perfectly competitive market has the following characteristics: There are many buyers and sellers The product is standardized or homogeneous Firms can freely enter or leave the market Both buyers and sellers take the market price as “given,” i.e. they are price takers Although the model of perfect competition is not very realistic, it can provide a good approximation of the reality in some markets, including the market for gasoline and some markets for agricultural products. Preview: Alternative Market Structures Besides perfect competition, there are three other types of market settings: Monopoly (characterized by a single seller), oligopoly (there are only a few producers), and monopolistic competition (many firms selling a slightly different product). The summary of four types of markets is given in Table 9.1. Remember that the market demand curve shows the relationship between the price and the quantity that can be sold in the market by all firms. In contrast, a firm-specific demand curve shows the relationship between the price charged by a single firm and quantity sold by that firm . The key difference between a perfectly competitive market and all other markets is the assumption about price taking, i.e. the shape of the firm-specific demand curve. As shown in Figure 9.1, the firm-specific demand assuming perfect competition is horizontal, because the firm is a price-taker (panel B), whereas the demand curve of a monopolist has a “conventional” negative slope. The Firm’s Short-Run Output Decision Regardless of the market type, any firm’s objective is to maximize economic profit, defined as the total revenue minus total economic cost. Total revenue is equal the price firm charges times the output it sells . In contrast, as we have seen in the previous chapter, the accounting profit equals total revenue minus explicit (or accounting) cost. The simplest way to find an output at which the profit is maximized is to compare revenue and cost at each output level using a table. For example, Table 9.2 shows that at either 7 or 8 units of output this difference is the greatest, and the profit is equal to $33. Figure 9.2 provides a graphical interpretation and shows that the vertical difference between the
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Chapter%209 - Econ 160, Vardanyan Chapter 9 Perfect...

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