Chapter 5 Market Structure Perfect Competition

Chapter 5 Market Structure Perfect Competition - Chapter 5...

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Chapter 5 Module 5 Lecture Notes LECTURE NOTES I. Learning objectives – In this chapter students will learn: A. The names and main characteristics of the four basic market models. B. The conditions required for purely competitive markets. C. How purely competitive firm maximize profits or minimize losses. D. Why the marginal cost curve and supply curve of competitive firms are identical. E. How industry entry and exit produce economic efficiency. F. The differences between constant-cost, increasing-cost, and decreasing-cost industries. II. Four market models. A. Pure competition entails a large number of firms, standardized product, and easy entry (or exit) by new (or existing) firms. B. At the opposite extreme, pure monopoly has one firm that is the sole seller of a product or service with no close substitutes; entry is blocked for other firms. C. Monopolistic competition is close to pure competition, except that the product is differentiated among sellers rather than standardized, and there are fewer firms. D. An oligopoly is an industry in which only a few firms exist, so each is affected by the price-output decisions of its rivals. III. Pure Competition: Characteristics and Occurrence A. The characteristics of pure competition: 1. Pure competition is rare in the real world, but the model is important. a. The model helps analyze industries with characteristics similar to pure competition. b. The model provides a context in which to apply revenue and cost concepts developed in previous chapters. c. Pure competition provides a norm or standard against which to compare and evaluate the efficiency of the real world. 2. Many sellers means that there are enough so that a single seller has no impact on price by its decisions alone. 3. The products in a purely competitive market are homogeneous or standardized; each seller’s product is identical to its competitor’s.
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4. Individual firms must accept the market price; they are price takers and can exert no influence on price. 5. Freedom of entry and exit means that there are no significant obstacles preventing firms from entering or leaving the industry. B. There are four major objectives to analyzing pure competition. 1. To examine demand from the seller’s viewpoint, 2. To see how a competitive producer responds to market price in the short run, 3. To explore the nature of long-run adjustments in a competitive industry, and 4. To evaluate the efficiency of competitive industries. IV. Demand from the Viewpoint of a Competitive Seller A. The individual firm will view its demand as perfectly elastic. 1. Figures in text illustrate this. 2. The demand curve is not perfectly elastic for the industry: It only appears that way to the individual firm, since they must take the market price no matter what quantity they produce. 3.
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This note was uploaded on 08/25/2011 for the course ECON 202 taught by Professor Wencel during the Spring '11 term at VCU.

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Chapter 5 Market Structure Perfect Competition - Chapter 5...

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