Ec100A Ch8 - 8 COMPETITIVE SUPPLY Econ 100A Mortimer...

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COMPETITIVE SUPPLY 8 Econ 100A Mortimer
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PERFECTLY COMPETITIVE MARKETS The model of perfect competition rests on three basic assumptions: (1) price taking; (2) product homogeneity; and (3) free entry and exit. Price Taking Because each individual firm sells a sufficiently small proportion of total market output, its decisions have no impact on market price. price taker Firm that has no influence over market price and thus takes the price as given. Product Homogeneity When the products of all of the firms in a market are perfectly substitutable with one another—that is, when they are homogeneous —no firm can raise the price of its product above the price of other firms without losing most or all of its business. e.g., commodities such as wheat, corn, cotton, etc. Econ 100A Mortimer
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PERFECTLY COMPETITIVE MARKETS Free Entry and Exit free entry ( or exit) Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry. When Is a Market Highly Competitive? Many markets are highly competitive – firms face highly elastic demand curves and relatively easy entry and exit. Because firms can implicitly or explicitly collude in setting prices, the presence of many firms is not sufficient for an industry to approximate perfect competition. Conversely, the presence of only a few firms in a market does not rule out competitive behavior. Econ 100A Mortimer
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Do Firms Maximize Profit? The assumption of profit maximization is frequently used in microeconomics because it predicts business behavior reasonably accurately and avoids unnecessary analytical complications. Managers may be concerned with revenue maximization, revenue growth, or the payment of dividends to satisfy shareholders (rather than profit maximization). Moreover, managers may sometimes operate using rules of thumb. In any case, firms that do not come close to maximizing profit are not likely to survive. Firms that do survive in competitive industries make long-run profit maximization one of their highest priorities. Thus, the assumption of profit maximization is reasonable. Econ 100A Mortimer
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Ec100A Ch8 - 8 COMPETITIVE SUPPLY Econ 100A Mortimer...

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