Lecture5_

Lecture5_ - Perfectly Competitive Market LECTU RE The Firms...

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Perfectly Competitive Market LECTURE
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Slide 2 The Firm’s Objective The Firm’s Objective : The owners and managers of firms make decisions based on their efforts to maximize profits .
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Slide 3 Definition (I): Profit The profit earned by a firm is the total revenue it receives from the sale of its product minus all costs -explicit and implicit- incurred in producing it. Profit = Total Revenue - All Costs (explicit & implicit).
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Slide 4 Definition (II): Profit-Maximizing Firm A profit-maximizing firm is one whose primary goal is to maximize the difference between its total revenues and total costs. Every profit-maximizing firm operates in an environment or context. Economists isolate several contexts based on market position or market power .
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Slide 5 Definition (III): Price Taker A price taker is a firm that has no influence over the price at which it sells its product. Its response to economic conditions comes only through adjustments in the quantity of product that it places on the market.
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Slide 6 Price Setters Contrast with single firms that are the only firms producing a unique product: price setters (= monopoly). Microsoft operating systems Intel microprocessors
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Slide 7 Price Setter versus Price Taker Apple iPod: Price setter Generic MP3 player: Price taker
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Slide 8 Definition (IV): Perfectly Competitive Market A perfectly competitive market is one in which no individual supplier has significant influence on the market price of the product.
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Slide 9 The Characteristics of Perfect Competition 1. All firms sell the same standardized product (= homogenous good). 2. The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged. 3. Productive resources are mobile. 4. Buyers and sellers are well informed.
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Slide 10 Perfectly Competitive Markets Very few markets satisfy all conditions for perfect competition / Still useful as frame of reference . Some aspects of agriculture provide close examples: Wheat farmers… …or rice farmers… … have no control over the price of their product.
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Slide 11 Perfectly Competitive Markets Giordano and Bossini compete with each other for customers… …but they do have at least some control over the prices that they charge => they do not meet the criteria to be firms in a competitive industry. They are not in competitive industries, but they are surely business rivals struggling with each other over potential customers in the local community.
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Slide 12 The Demand Curve Facing a Perfectly Competitive Firm P 0 Q 0 S D Market Quantity (units/month) Price ($/unit) Market supply and demand
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Slide 13 D i P 0 The Demand Curve Facing a Perfectly Competitive Firm Price ($/unit) Individual Firm’s Quantity (units/month) Individual firm demand
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Slide 14 Factors of Production A factor of production is an input used in the production of a good or service.
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This note was uploaded on 04/21/2011 for the course ECON 1001 taught by Professor S.c during the Fall '10 term at HKU.

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Lecture5_ - Perfectly Competitive Market LECTU RE The Firms...

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