Chapter 14 Notes - [ChapterFourteen PerfectCompetition...

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[Chapter Fourteen] Perfect Competition Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. List the six conditions for a perfectly competitive market. 2. Explain why producing an output at which marginal cost equals price maximizes total profit for a perfect competitor. 3. Demonstrate why the marginal cost curve is the supply curve for a perfectly competitive firm. 4. Determine the output and profit of a perfect competitor graphically and numerically. 5. Construct a market supply curve by adding together individual firms’ marginal cost curves. 6. Explain why perfectly competitive firms make zero economic profit in the long run. 7. Explain the adjustment process from short-run equilibrium to long-run equilibrium. Chapter Outline Perfect Competition The word competition has two uses: the first is as a process that describes rivalry among firms; the second is as a perfectly competitive market structure. The second sense is the subject of this chapter. In physics, you first learn about how gravity works in a vacuum; the same is true with economics. A Perfectly Competitive Market Perfectly Competitive Market: “A market in which economic forces operate unimpeded.”
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There are six stringent conditions: both buyers and sellers are price takers, the number of firms is large, there are no barriers to entry, firms’ products are identical, there is complete information, and selling firms are profit-maximizing entrepreneurial firms. The Necessary Conditions for Perfect Competition 1. Both buyers and sellers are price takers. Price Taker: “A firm or individual who takes the price determined by market supply and demand as given.” Example: you go to the store and discover what the price of toothpaste is, so you’re a price taker. 2. The number of firms is large—sufficiently large so that any one firm’s output compared to the market output is imperceptible. 3. There are no barriers to entry. Barriers to Entry: “Social, political, or economic impediments that prevent firms from entering a market.” Examples: patents, minimum efficient level of production, or racism. 4. Firms’ products are identical. On firm’s output is indistinguishable from another firm's output. Example: corn bought by the bushel. 5. There is complete information. Firms and consumers know all there is to know about the market. 6. Selling firms are profit-maximizing entrepreneurial firms. The Definition of Supply and Perfect Competition Combined, these conditions lead to an environment in which each firm will offer goods to the market in a predictable way. Definition of supply from Chapter 4: “Supply is a schedule of quantities of goods that will be offered to the market at various prices.” This definition requires the first condition: that the supplier to be a price taker. In other market structures, firms don’t figure out how much to produce at market prices, but rather how much to produce and what
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Chapter 14 Notes - [ChapterFourteen PerfectCompetition...

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