Perloff_397614_IM_Ch08

Perloff_397614_IM_Ch08 - Chapter 8 Competitive Firms and...

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Chapter 8 Competitive Firms and Markets Chapter Outline 8.1 Competition Price Taking Why the Firm’s Demand Curve Is Horizontal Derivation of a Competitive Firm’s Demand Curve Why Perfect Competition Is Important 8.2 Profit Maximization Profit Two Steps to Maximizing Profit 8.3 Competition in the Short Run Short-Run Competitive Profit Maximization Short-Run Firm Supply Curve Short-Run Market Supply Curve Short-Run Competitive Equilibrium 8.4 Competition in the Long Run Long-Run Competitive Profit Maximization Long-Run Firm Supply Curve Long-Run Market Supply Curve Long-Run Competitive Equilibrium Teaching Tips Chapter 8 begins the study of markets. You might take 10 minutes or so on the day you begin this section to talk with the class about market structure in its broadest terms. Introduce the spectrum of market structures by briefly defining the competitive, monopolistically competitive, oligopoly, and monopoly market structures. By doing so, you will answer some questions in advance about markets that do not fit into the competitive model. If you ask the students for a list of characteristics that describe a competitive market, or a firm in such a market, you are likely to get a combination of assumptions (e.g., free entry and exit, perfect information) and outcomes (e.g., lack of market power, zero long-run profits). Probably the most common mistake that students make at this stage is to confuse assumptions and outcomes. It is important that students understand that price taking behavior is not assumed, or a choice that firms make, but an outcome that is driven by the assumptions that are made.
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Chapter 8 Competitive Firms and Markets 103 Before beginning the material on short- and long-run profit maximization, you may want to review the difference between economic profit and business profit. Throughout the chapter, the text uses the word profit to mean economic profit. Most of the material on short-run profit maximization is straightforward, and should not be cause for much confusion. The possible exception is the shut-down rule. You may find that no matter how much you emphasize to the class that the firm must cover its variable cost, some still remember it as the firm needing to cover fixed cost to avoid shut-down. You may reduce this confusion by the use of a simple example. You might describe a firm where the only fixed cost is a mortgage payment, and the only variable cost is the payroll. It makes intuitive sense that as long as the firm can make the payroll every week, even if they can only pay part of their mortgage, they can hang on and hope for higher prices. However, once the firm can’t even cover their payroll, they must shut down. When covering the firm and market short-run supply curves, you might emphasize that the point at which the supply curve is cut off at the lower end is not arbitrary, but a function of the average variable cost curve and shut-down point. The section of the chapter that covers short-run supply contains a good discussion of the effect of changes in input prices and taxes on equilibrium output levels. You may want to work through
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