Chapter 20 ECON Perfect Competition

Chapter 20 ECON Perfect Competition - CHAPTER 22 Perfect...

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CHAPTER 22 Perfect Competition In macroeconomics we talk about aggregate supply, suggesting that all producers find themselves in similar situations, face similar choices, and make similar rational decisions. In Chapter 21, we talked about the relationship between costs and production. Again, we treated all producers as essentially the same. Now we begin to delve into the situations, choices, and rational decisions that firms face. Chapters 22–24 are about market structure —the particular environment in which a firm operates—and how it affects a firm’s pricing and output decisions. In this chapter, we look at the theory of perfect competition, optimal short-run behavior for a perfectly competitive firm, optimal long-run behavior of the perfectly competitive market, and the relationship between perfect competition, resource allocative efficiency, and productive efficiency. CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Explain why a perfectly competitive firm faces a horizontal (flat, perfectly elastic) demand curve. 2. Explain why a perfectly competitive firm seeks to produce that quantity of output at which MR = MC. 3. Identify the condition under which a firm should shut down. 4. Explain how a market supply curve is derived. 5. Identify long-run competitive equilibrium. 6. Explain the process whereby a firm moves from one long-run equilibrium position to another. 7. Explain why higher costs don’t always mean higher prices. KEY TERMS market structure • short-run market (industry) supply curve perfect competition • long-run competitive equilibrium price taker • productive efficiency marginal revenue (MR) • constant-cost industry profit-maximization rule • long-run (industry) supply curve resource allocative efficiency • increasing-cost industry short-run (firm) supply curve • decreasing-cost industry 213
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214 Chapter 22 CHAPTER OUTLINE I. THE THEORY OF PERFECT COMPETITION A.Basic Assumptions —A market structure is a firm’s particular environment, the characteristics of which influence the firm’s decisions. The theory of perfect competition rests on four basic assumptions: 1.There Are Many Sellers and Buyers, None of Which Is Large In Relation to Total Sales or Purchases —There are many sellers and many buyers, none of which is large in relation to total sales or purchases, such that no single seller or buyer has any power to significantly influence market price. 2.Each Firm Produces and Sells a Homogeneous Product —Each supplying firm produces a homogeneous product—that is, a product that is indistinguishable from the product of any other firm in the industry. 3.Buyers and Sellers Have All Relevant Information about Prices,
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Chapter 20 ECON Perfect Competition - CHAPTER 22 Perfect...

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