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Unformatted text preview: Economics: The Basics Study Guide: Chapter 5 Outline • Perfect Competition: o Necessary conditions : buyers and sellers are price takers, products are standardized, buyers and sellers are well-informed; therefore there are many buyers and sellers in the market, and no barriers to entry. o Marginal Revenue (MR) = Price (P) ; businesses are price takers and must accept the market price. Profit maximized where Marginal Cost (MC) = Price (P). o In equilibrium, supply will equal demand. o In the long run : Profits will tend towards zero. Only the low-cost businesses will survive. o Shutting down will occur when costs exceed revenues. o Escaping Perfect Competition Some ways to escape perfect competition include: differentiating your product, advertising, or utilizing a reputational effect. • Monopolistic Competition occurs when there are many sellers of products that are similar, but not standardized. o Profit maximized where MR=MC, but in this case, MR<P. MR<P because in order to increase sales, the business must lower prices to all customers. o In the long run, it begins to look more like perfect competition; it is difficult to maintain product differentiation because of imitation. • Oligopoly occurs when there is a small (four or fewer) number of sellers in the market producing similar goods. o They can engage in intense competition with each other or, alternatively, they can engage in collusion. Collusion occurs when businesses attempt to cooperate with each other to keep prices high. • Collusion is difficult to maintain, because the incentive to increase profits often leads businesses to cheat by lowering their price. • Monopoly occurs when there is only one seller of a particular good, and buyers have no other alternatives. o This is the extreme opposite of perfect competition. o Natural monopolies occur when it is efficient to only have one producer of a good; natural monopolies typically have large fixed costs and low variable costs. Economics: The Basics Study Guide: Chapter 5 • Perfect Competition vs. Market Power o Perfect competition allows buyers and sellers to coordinate voluntarily. allows buyers and sellers to coordinate voluntarily....
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This note was uploaded on 12/27/2011 for the course FBAE 201 taught by Professor Eefwf during the Spring '11 term at Institute of Technology.
- Spring '11