CHAPTER_8_OUTLINE

CHAPTER_8_OUTLINE - CHAPTER 8 PERFECT COMPETITION (6e) In...

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CHAPTER 8 – PERFECT COMPETITION (6e) In chapters 8, 9, and 10 we will be studying different types of industries: (1) perfect competition (Ch. 8) (2) monopoly (Ch. 9) (3) monopolistic competition (Ch. 10) (4) oligopoly (also Ch. 10) An industry consists of all firms that supply output to a particular market. Market structure : This term refers to the important features or characteristics of a market, such as the number of firms (many or few), the similarities or differences of the firms’ products, the ease or difficulty of entering or leaving the market, the manner in which firms compete, and the degree to which firms dominate the market by means of price, output, or other factors. A. Introduction to Perfect Competition 1) Features of Perfect Competition 2) 2) 3) 4) 5) As a result of the above features, each firm in a perfectly competitive market is a price taker : the price is determined by market supply and demand conditions, and each firm just “takes” and charges that price. The firm may supply any amount of output at that price, and will seek to supply the output that maximizes its profit . 1
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1. Demand Under Perfect Competition Ex. 1 The market price of $5 is determined by the market S and D (panel a). Each firm “takes” that price and can sell as much as it wants at that price. This is because customers demand the firm’s product as long as the firm charges the market price. So the firm faces a horizontal (perfectly elastic) demand curve at the market price (panel b). i. Short-Run Profit Maximization Remember that the goal of the firm is to maximize economic profit . There are two ways to find the amount of output that will maximize the firm’s profit: the “total approach” and the “marginal approach.” 2. The “Total Approach” to Profit Maximization: Total Revenue minus Total Cost Total profit = total revenue - total cost = (P x Q) - (FC + VC) In perfect competition, the firm has no control over price; the firm can control quantity. Thus, the firm’s choice of output level determines its total revenue and total cost, thereby determining its profit. There are three possible relationships between TR and TC: If TR < TC, the firm operates at a loss . If TR = TC, the firm breaks even (zero profit, zero loss) If TR > TC, the firm has a profit . The firm’s goal is to earn the largest profit! Total profit is maximized when TR>TC by the greatest amount. 2
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Ex. 2, columns 1,2,3,4,and 7: Column 7 shows the firm’s losses and profits. Total profit is maximized when TR>TC by the greatest amount; this occurs at an output of 12 units, which is thus the profit-maximizing level of output for this firm. Ex. 3, panel (a): Graphical depiction of the “total approach” TC curve has the shape we saw in Ch. 7. Total revenue for a perfectly competitive
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This note was uploaded on 01/19/2011 for the course ECON 6E taught by Professor Mohammadr.safarzadeh during the Spring '10 term at UC Irvine.

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CHAPTER_8_OUTLINE - CHAPTER 8 PERFECT COMPETITION (6e) In...

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