IMCH11new07 - Chapter 11 Perfect Competition Chapter...

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Chapter 11 Perfect Competition Chapter Summary Chapter 11 describes the model of perfect competition in both the short run and the long run. The chapter begins with a discussion of economic profit versus accounting profit; an example of a miniature golf course run by Cullen Trump (Donald's nephew) is used to illustrate the impor- tance of including all implicit costs (in this case, the value of property in Manhattan). The section concludes with a discussion of profit maximization. The second section deals with the "four assumptions for perfect competition": (1) firms sell a standardized product; (2) firms are price takers; (3) factors of production are perfectly mobile in the long run; (4) firms and consumers have perfect information. These assumptions are used to derive the short-run equilibrium for perfect competition, first for the firm and then for the industry. The chapter makes a considerable effort to show the efficiency of perfect competition, including a fairly extensive discussion of producer surplus. The final part of Chapter 10 deals with the long-run equilibrium in perfect competition and the elasticity of supply. Chapter Outline Chapter Preview The Goal of Profit Maximization The Four Conditions for Perfect Competition The Short-Run Conditions for Profit Maximization and shut down strategy Short-Run Competitive Industry Supply Short-Run Competitive Equilibrium The Efficiency of Short-Run Competitive Equilibrium Producer Surplus Adjustments in the Long Run The Invisible Hand Application: The Cost of Extraordinary Inputs The Long-Run Competitive Industry Supply Curve The Elasticity of Supply Applying the Competitive Model Summary Teaching Suggestions 1. This text moves into the market forms rather quickly without much discussion of the dynamics that lead to the various market structures. It would be worth the time to begin the market structure chapters with a discussion of why firms are formed the way they are. Entertain Ronald Coase's question about why some firms which preach the virtues of a market economy are as big as some entire national economies. Does this imply that small countries should have planned economies? I find it helpful to relate the issue to a student selling encyclopedias during the summer. Assume that survival depends upon earning enough in a given day to eat that evening. Are the consequences of a bad day so severe that it might be better to have a partner or partners who could cover more streets and ensure against starvation if any one of them had a stretch of bad luck on a given day. If they all pooled their profits at the day's end and shared equally in the profits, the risk of starvation may be minimized. In this case a larger firm would be preferred to many smaller producers. However, what other problems arise? Can each person be trusted to do their best if they get
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IMCH11new07 - Chapter 11 Perfect Competition Chapter...

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