Ch. 9 Sec. 1 - chapter 9 Perfect Competition and the >...

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>> Perfect Competition and the Supply Curve Section 1: Perfect Competition chapter 9 Suppose that Yves and Zoe are neighboring farmers, both of whom grow organic tomatoes. Both sell their output to the same grocery store chains that carry organic foods; so, in a real sense, Yves and Zoe compete with each other. Does this mean that Yves should try to stop Zoe from growing tomatoes or that Yves and Zoe should form an agreement to grow less? Almost certainly not: there are hundreds or thousands of organic tomato farmers, and Yves and Zoe are competing with all those other growers as well as with each other. Because so many farmers sell organic tomatoes, if any one of them produced more or less, there would be no measure able effect on market prices. When people talk about business competition, the image they often have in mind is a situation in which two or three rival firms are intensely struggling for advantage. But economists know that when a business focuses on a few main competitors, it’s actually a sign that competition is fairly limited. As the example of organic tomatoes suggests, when there is enough competition it doesn’t even make sense to identify your opponents: there are so many competitors that you cannot single out any one of them as a rival.
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We can put it another way: Yves and Zoe are price-taking producers. A produc- er is a price-taker when its actions cannot affect the market price of the good it sells. As a result, a price-taking producer considers the market price as given. When there is enough competition—when competition is what economists call “perfect”—then every producer is a price-taker. And there is a similar definition for consumers: a price-taking consumer is a consumer who cannot influence the market price of the good by his or her actions. That is, the market price is unaffected by how much or how little of the good the consumer buys. Defining Perfect Competition In a perfectly competitive market , all market participants, both consumers and pro- ducers, are price-takers. That is, neither consumption decisions by individual consumers nor production decisions by individual producers affect the market price of the good. The supply and demand model, which we introduced in Chapter 3 and have used
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This note was uploaded on 04/13/2010 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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Ch. 9 Sec. 1 - chapter 9 Perfect Competition and the >...

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