Chapter14 Additional Insights

Chapter14 Additional Insights - Chapter 14: Perfect...

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Chapter 14: Perfect Competition [Suggestion: This week the focus is looking at the economic decisions that firms make (how much to produce and how much to charge). We need to take industry structure into consideration. The first industry type that we address is a perfect competition. Please read this chapter carefully and learn it well…. .the next two chapters on monopoly, monopolistic competition, and oligopoly will subsequently be easier to understand.] Recall that when we started to look at the supply side of the market, we established that the role of the firm in the economy is to organize and use factor inputs (land, labor, and capital) to produce and sell output (goods or services). The goal of the firm is to maximize profit…. that is, economic profit which is the difference between revenue and opportunity cost (explicit costs and implicit costs). We then took a look at short run costs, which are related to the productivity of the variable input (usually labor). There are three families of costs: total, average, and marginal. And in the short run there are two types of costs: fixed and variable. Next we considered long run cost…there are no fixed costs in the long run because ALL inputs are variable. In the long run, we look at the pattern in average costs as the firm produces more and more output…decreases in long run average costs reflect the presence of economies of scale and increases in long run average costs reflect the occurrence of diseconomies of scale. Costs are one part of the profit picture. To complete the profit picture, and to look at the decisions that firms need to make in order to maximize their profit, we need to consider revenue. Revenue is what firms receive from producing and selling output…. think of it as “income” to the firm. When we looked at costs, we did not take into consideration what type of industry structure the firm operates within. In other words, all firms face the same cost considerations, regardless of what type of industry they are a part. On the other hand, the type of industry affects the firm’s revenue decision. In economics, there are four types of industry structures: o Perfect competition o Monopoly o Monopolistic competition o Oligopoly At one extreme is the perfect competition. We will look at the characteristics that are associated with a perfectly competitive industry but the most fundamental characteristic is that there are many sellers (firms) in the industry. At the other extreme is a monopoly, which is an industry in which only one firm produces all of the output. The monopolistic competition and the oligopoly are industry structures that are in between the two
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extremes…they each have distinct characteristics and behavior but I think of them as “hybrids” between the perfect competition and the monopoly. Keep in mind that the industries differ on the revenue side of operations, not the cost side.
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Chapter14 Additional Insights - Chapter 14: Perfect...

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