Cha_11 - 11 Chapte PERFECT r COMPETITION Chapter Key Ideas...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
11 COMPETITION C h a p t e r K e y I d e a s The Busy Bee A. There are thousands of beekeepers in the United States and many of them are struggling because a parasite is killing their bees. But the prices of renting bees has been rising for those who still have hives. B. The consumer electronics markets are also highly competitive. In the past few years consumers have seen significant declines in the price of personal computers. C. We can explain these observed changes in market price and firm output as firms operating within a market exhibiting perfect competition respond to shifting consumer demand and technological change. O u t l i n e I. What Is Perfect Competition? A. Perfect competition describes an industry in which: 1. Many firms sell identical products to many buyers. 2. There are no restrictions to entry into the industry. 3. Established firms have no advantages over new ones. 4. Sellers and buyers are well informed about prices. B. Perfect competition arises when: 1. Perfect competition occurs when the firms’ minimum efficient scale are small relative to demand for the good or service, and 2. when each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care from which firm they buy. C. In perfect competition, each firm is a price taker. 1. A price taker is a firm that cannot influence the market price and sets its own price at the market price. 2. Each firm produces a tiny proportion of the entire market and consumers are well informed about the prices charged by other firms. C h a p t e r
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 3. Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic. D. Economic Profit and Revenue The goal of each firm is to maximize economic profit , which equals total revenue minus total cost. 1. A firm’s total cost is the opportunity cost of production, which includes a normal profit—the return that the entrepreneur can expect to receive on the average in an alternative business . 2. A firm’s total revenue equals price, P , multiplied by quantity sold, Q , or P × Q . 3. A firm’s marginal revenue is the change in total revenue that results from a one- unit increase in the quantity sold. In perfect competition the price remains the same as the quantity sold changes, which means that marginal revenue equals the market price. 4. Figure 11.1 illustrates a firm’s revenue concepts. a) Figure 11.1(a) shows how the market demand and supply determine the equilibrium market price that the firm must take. b) Figure 11.1(b) shows the demand curve for the firm’s product, which is also its marginal revenue curve. The firm’s demand curve is perfectly elastic. c) Figure 11.1(c) shows the firm’s total revenue curve, with total revenue increasing as a constant rate.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/20/2009 for the course COBA FIN302 taught by Professor Nejlaellili during the Spring '09 term at BA Mannheim.

Page1 / 27

Cha_11 - 11 Chapte PERFECT r COMPETITION Chapter Key Ideas...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online