Section_Five-Perf_Comp_08 - SectionFive...

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Section Five Perfect Competition:   The First of  Four Industry Models
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First, we covered material that introduced you to  some basic concepts of economics (opportunity  costs, production possibilities, specialization, etc.). Then, we learned about supply and demand,  taking a closer look at each.
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This unit, and the following two units, will all use the  material that we have covered so far, to discuss four  different industry models. These industry models don’t refer to industries that  manufacture specific goods (the dairy industry, the textile  industry, etc.), they refer to four specific models that all  industries fit into. We study these models so as to better understand the  activities of various types of businesses.
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The four models are called: Perfect competition Monopolistic competition oligopoly  Pure monopoly These models exist on a continuum, with very few actual  businesses fitting the example of the extreme at either end  (the ends being perfect competition and pure monopoly)
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Let’s now begin by taking a close look at the  industry model called Perfect competition.
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Overview of  Characteristics Very large number of sellers Any industry that would fit into this model  would have a very  large number of sellers.  The  number would need to be in the hundreds or  maybe even the thousands.
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Standardized Product The product from one seller is virtually identical to the  product of another seller Since there is no difference in product, there is no point  in advertising or sales promotion for the product of an  industry in this model
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Important terminology Each individual firm is a  “price  taker”… each firm produces such a small percentage of  the total that any increase or decrease of output  will have little/no impact on total supply,  therefore each firm has little/no impact on price
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    Taking a closer look at this idea…let’s imagine that you  own a business in a perfectly competitive industry.   Your output amounts to 1/100 of 1% of the total supply  of the industry.   Say you are unhappy with the price you are getting for  your product, so you decide to raise your prices or to cut  back production in an attempt to create a shortage and  drive prices up…would it work?  
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Of course not.  If you raise your price, there are hundreds of other  suppliers with the exact same product for buyers to  turn to.   In addition, if you cut production in an attempt to  create a shortage to drive prices up, this will not work  either.   Your business is just a drop in the bucket.  If you take 
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This note was uploaded on 03/12/2011 for the course ECON 2011 taught by Professor Deluth during the Fall '08 term at University of Minnesota Morris.

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Section_Five-Perf_Comp_08 - SectionFive...

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