101-17_07 - Econ 101 Lecture 17 The Perfectly Competitive...

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Econ 101 Lecture 17 The Perfectly Competitive Firm Is a Price Taker (Recap) The perfectly competitive firm has no influence over the market price. It can sell as many units as it wishes at that price. Typically, a "perfectly" competitive industry is one that consists of a large number of sellers, each of which makes a highly standardized product. An example is corn production. Profit-maximization for the perfectly competitive firm Profit = Total revenue - total cost Q. How much output should a perfectly competitive firm produce if its goal is to earn as much profit as possible? A. It should keep expanding output as long as the marginal benefit of doing so exceeds the marginal cost. The marginal benefit of expanding output by one unit is the market price. The marginal cost of expanding production by one unit is the firm's marginal cost at its current production level. Example 17.1 . Consider a corn grower whose marginal cost of growing corn is labeled MC in the diagram. If this grower can sell as many bushels of corn as he chooses to at a price of $5 per bushel, how many bushels should he sell in order to maximize profit? $/bushel Thousands of bushels of corn/yr 5 Marginal cost of producing corn Price 12 9 6 4 6 The profit-maximizing quantity for the perfectly competitive firm is the one for which price = MC. Imperfect Competition Monopoly = "single seller" Example: Time Warner Cable in the Ithaca market for cable TV service Oligopoly = "few sellers" Monopolistic competition : Many sellers, each with a differentiated product Example: Local gasoline retailing Five Sources of Monopoly 1. Exclusive control over important inputs   Example: Perrier's mineral spring 2. Economies of Scale  (Natural monopoly) Example: Local telephone service 3. Patents  4. Government licenses or franchises Example: Burger King on Mass Pike
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2 5. Network Economies Example: Microsoft Windows Most enduring source of monopoly is economies of scale. Scale Advantage in the Old Economy
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101-17_07 - Econ 101 Lecture 17 The Perfectly Competitive...

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