ch08 - CHAPTER 8 OUTLINE 8.1 Perfectly Competitive Markets...

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1 of 36 CHAPTER 8 OUTLINE 8.1 Perfectly Competitive Markets 8.2 Profit Maximization 8.3 Marginal Revenue, Marginal Cost, and Profit Maximization 8.4 Choosing Output in the Short Run 8.5 The Competitive Firm’s Short-Run Supply Curve 8.6 The Short-Run Market Supply Curve 8.7 Choosing Output in the Long Run 8.8 The Industry’s Long-Run Supply Curve
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2 of 36 PERFECTLY COMPETITIVE MARKETS 8.1 The model of perfect competition rests on three basic assumptions: (1) price taking, (2) product homogeneity, and (3) free entry and exit. Price Taking Because each individual firm sells a sufficiently small proportion of total market output, its decisions have no impact on market price. price taker Firm that has no influence over market price and thus takes the price as given. Product Homogeneity When the products of all of the firms in a market are perfectly substitutable with one another—that is, when they are homogeneous no firm can raise the price of its product above the price of other firms without losing most or all of its business.
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3 of 36 PERFECTLY COMPETITIVE MARKETS 8.1 Free Entry and Exit free entry ( or exit) Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry. When Is a Market Highly Competitive? Because firms can implicitly or explicitly collude in setting prices, the presence of many firms is not sufficient for an industry to approximate perfect competition. Conversely, the presence of only a few firms in a market does not rule out competitive behavior.
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4 of 36 PROFIT MAXIMIZATION 8.2 Do Firms Maximize Profit? The assumption of profit maximization is frequently used in microeconomics because it predicts business behavior reasonably accurately and avoids unnecessary analytical complications. For smaller firms managed by their owners, profit is likely to dominate almost all decisions. In larger firms, however, managers who make day-to-day decisions usually have little contact with the owners (i.e. the stockholders). In any case, firms that do not come close to maximizing profit are not likely to survive. Firms that do survive in competitive industries make long-run profit maximization one of their highest priorities. Alternative Forms of Organization cooperative Association of businesses or people jointly owned and operated by members for mutual benefit.
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5 of 36 PROFIT MAXIMIZATION 8.2 Nationwide, condos are a far more common than co-ops, outnumbering them by a factor of nearly 10 to 1. In this regard, New York City is very different from the rest of the nation—co-ops are more popular, and outnumber condos by a factor of about 4 to 1. What accounts for the relative popularity of housing cooperatives in New York City? Part of the answer is historical. Housing cooperatives are a much older form of organization in the U.S. The building restrictions in New York have long disappeared, and yet the
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This note was uploaded on 12/12/2009 for the course ECON 2296 taught by Professor Gray during the Spring '09 term at Langara.

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ch08 - CHAPTER 8 OUTLINE 8.1 Perfectly Competitive Markets...

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