Chapter 8 Outline - Chapter 8: Competitive Firms and...

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Chapter 8: Competitive Firms and Markets Market structure: the number of firms in the market, the ease with which firms can enter and leave the market, and the ability of firms to differentiate their products from those of their rivals Competitive market structures, in which many firms produce identical products and firms can easily enter and exit the market, all firms are price takers Main Topics: 1) Competition: A competitive firm is a price taker, and as such, it faces a horizontal demand curve 2) Profit Maximization: To maximize profit, any firm must make two decisions: how much to produce and whether to produce at all 3) Competition in the short run: Variable costs determine a profit-maximizing, competitive firm’s supply curve, the market supply curve, and with the market demand curve, the competitive equilibrium in the short run 4) Competition in the long run: Firm supply, market supply, and competitive equilibrium are different in the long run than in the short run because firms can vary inputs that were fixed in the short run 5) Zero profit for competitive firms in the long run: In the long-run competitive market equilibrium, profit –maximizing firms break even, so firms that do not try to maximize profits lose money and leave the market 8.1 Competition A market is competitive if each firm in the market is a price taker : a firm that cannot significantly affect the market price for its output or the prices at which it buys its inputs The firm has to be a price taker if it faces a demand curve that is horizontal at the market price If the demand curve is horizontal to the market price, the firm can sell as much as it wants at the market price, so it has no incentive to lower its price. Firms are likely to be price takers in the market that have some or all of four properties: 1) Consumers believe that all firms in the market sell identical products 2) Firms freely enter and exit the market 3) Buyers and sellers know the prices charged by firms 4) Transaction costs -the expenses of finding a trading partner and making a trade for a good or service other than the price paid for that good or service- are low If some customers prefer one firm’s produce to those of other firms, the firm’s demand curve has a downward slope
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Transaction costs are low if buyers and sellers do not have to spend time and money fighting each other or hiring lawyers to write contracts in order to make trade The higher the transaction costs, the more likely that a firm’s demand curve is sloping downward Competitive markets are important because: o Many markets can be reasonably described as competitive o A perfectly competitive market has many desirable properties
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Chapter 8 Outline - Chapter 8: Competitive Firms and...

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