ch 8 - Ch 8. Profit Maximization for the Competitive Firm...

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Ch 8. Profit Maximization for the Competitive Firm OBEJCTIVES By the end of this chapter, you should be able to: o Describe the characteristics of the perfectly competitive market. o Explain the marginal revenue for a competitive firm o State and explain the profit maximizing rule for a competitive firm. o Given the market price and cost information, find the profit maximizing output and profit/loss on a graph or table. o Explain when a competitive firm might or might not shut down in the short run. The Perfectly Competitive Market In this chapter we are going to look at how a firm in a competitive market makes the decision of how much to produce in the short run. Why start with a competitive market? It is the easiest market to model, it is the basis for the standard microeconomic approach and it is the only market type that is, under certaing conditions, efficient. Therefore, we will take a careful look at how businesses behave in this type of market and what the outcomes are in both the long and short run. We will then uses this as a standard or benchmark to measure how markets in the real world perform. Markets do not all have the same structures and behaviors. The standard supply and demand model that you may have heard of or worked with in other classes is based on what is called the ‘perfectly competitive’ market structure. Economists usually just call it a competitive market Characteristics of Competitive Market There are three characteristics that are used to define a particular market structure: concentration, product differentiation and barriers to entry. These characteristics primarily determine the degree to which producers have some market power, such as control over the price, output or the actions of other producers in a market. In a perfectly competitive market, producers have no market power. It is also presumed that consumers have no market power. Concentration. The first characteristic is the degree to which production is concentrated in a relatively small number of sellers. In a competitve market, there are many sellers and no seller has a large enough market share (the proportion of sales in the market) to have any influence over the price. Product Differentiation The products offered by various sellers are essentially the same. The good must seem similar enough to consumers, that they are not be willing to pay more for the product of
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one producer over another. Barriers to Entry In a competitve market, there are no substantial barriers that prevent firms from entering the market to sell the product. This does not mean that any person could start a business, but that entreprenues experienced in the industry could raise sufficient financing to enter the market and not face any significant disadvantages to te existing producers. In a very simple way, this means that if firms are making above normal profits in this market, there will be entry - the barriers are sufficiently low that if there is an incentive, entry will occur.
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This note was uploaded on 07/17/2011 for the course ECON 102 taught by Professor Jarv during the Summer '09 term at Rio Hondo College.

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ch 8 - Ch 8. Profit Maximization for the Competitive Firm...

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