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Chapter 11 Idelaized Competition

Chapter 11 Idelaized Competition - CHAPTER 11 Firm...

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CHAPTER 11 Firm Production under Idealized Competitive Conditions Economists understand by the term market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality, easily and quickly. Augustin Cournot receding chapters dealt separately with the two sides of markets, consumers and producers. We devised graphic means of representing consumer preferences (the demand curve) and producer costs (average and marginal cost curves). This chapter brings demand and cost analysis together in order to examine the way in which individual firms react to consumer demand in competitive markets. Our focus will be on a highly competitive market structure called perfect competition. We will investigate an intriguing question: at the limit, how much can competitive markets contribute to consumer welfare? We will not attempt to give a full description of a real-world competitive market setting. Because markets are so diverse, such a description would probably not be very useful. Our aim is rather to devise a theoretical framework that will enable us to think about how markets work in general, as a constructive behavioral force. Although our model cannot tell much that is specific about real-world markets, it will provide a basis for predicting the general direction of changes in market prices and output. Through its analysis, we should gain a deeper understanding of the meaning of market efficiency. Perfect competition is only one of four basic market structures. The other three, and the detrimental effects of their restrictions on competition, are the subjects of following chapters. The Four Market Structures Markets can be divided into four basic categories, based on the degree of competition that prevails within them -- that is, on how strenuously participants attempt to outdo, and avoid being outdone by, their rivals. The most competitive of the four market structures is perfect competition. Perfect Competition As we stressed much earlier in the book, perfect competition represents an ideal degree of Perfect competition can be recognized by the following characteristics: P
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Chapter 11 Firm Production under Idealized Competitive Conditions 1. There are many producers in the market, no one of which is large enough to affect the going market price for the product. All producers are price takers, as opposed to price searchers or price makers (see the Perspective on the subject below). 2. All producers sell a homogeneous product, meaning that the goods of one producer are indistinguishable from those of all others. Consumers are fully knowledgeable about the prices charged by different producers and are totally indifferent as to which producer they buy from.
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