ln7_marketstructure - Lecture 7: Market Structure I....

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1 Lecture 7: Market Structure I. Perfect Competition 1. A "perfectly competitive" market has the following characteristics: * each business sells the exact same product * each business is relatively small and can't affect the price of the product * each business is a "price taker", meaning the price is set in the 'big" market of all the businesses interacting with demand * new businesses can easily enter and existing businesses can easily exit the market * each business generally makes only "normal" profits - "above normal" or "below normal" profits can only be earned for a short period of time 2. Easy entry and exit keep profits "normal": if profits are higher than normal, new businesses enter the market, supply is increased, and price falls, restoring normal profits. If profits are lower than normal, some existing businesses leave the market, supply is decreased, and the price rises, restoring normal profits. 3. If there are any differences in price, they will reflect cost differences (e.g., extra cost of dry- cleaning women's blouses by hand vs. by machine for men's shirts). 4. Individual business in perfect competition will take product price as "given" and then determine output that will maximize profits. Will produce more the higher the price. 5. In perfect competition, business people are constantly trying to "find an edge" - to make the product cheaper. If they can, they will be able to earn "above
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This note was uploaded on 10/12/2008 for the course HIST 203 taught by Professor James during the Spring '08 term at N.C. State.

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ln7_marketstructure - Lecture 7: Market Structure I....

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