compmanual econ chapter 19 - Competition Manual Purpose of...

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Competition Manual Purpose of the Module This module is designed to allow the user to practice running a firm in a competitive market. You will have to respond to a fluctuating market price, and try to maximize short run profit for the firm. You can either select different market prices or let the computer randomly select different market prices for your firm. The firm then tries to maximize profits given the chosen market price. In order to do a good job you will have to figure out how the firm’s costs change as its level of production changes, how its revenues change as its production changes, and how profits or losses are affected by cost and revenue changes. No real world firms operate in competitive markets, but the principles governing successful profit maximization that apply in competitive markets also apply in the kinds of markets that firms do operate in. There are differences in the details of how the principles are applied, but if you master the reasoning required by this module, applying it to other, more realistic, situations should not be too difficult. The most important aspect of that reasoning is marginal analysis. You do not start out by thinking about whether you should do everything or nothing. That question may come up eventually, but the more important questions are “Should I produce the next unit?” and “Should I have produced the previous unit?” As long as you keep getting an affirmative answers to these questions, you will continue to raise profits or lower losses. Throughout the module, you will be focusing on the desirability of making small changes in the amount of output, and evaluating whether or not those small changes increase the firm’s profits or reduce its losses. This incremental analysis is the “marginal” analysis that will guide the firm towards maximizing total economic profits or minimizing total economic losses. The Model This module features a firm in a competitive market. To understand the firm’s problems you need to understand how that kind of market works. First, some definitions of terms that are important in understanding the model are provided. Then an explanation of the competitive market and how it functions, and a discussion of how an individual firm fits into such markets are provided. Price (P) At a given moment of time the market price is the dollar amount that will be paid in the market for one unit of the product. Every unit sold will be sold at this price regardless of which firm sold it, or who bought it. In the real world, the firm’s price in a competitive market is determined by the market demand and supply for the product. Each purely competitive firm “takes”, or accepts, the price that is determined by the market, or
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industry, and then chooses the quantity it will offer for sale so as to maximize total economic profits or minimize total economic losses.
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compmanual econ chapter 19 - Competition Manual Purpose of...

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