CHAPTER 7(22)

CHAPTER 7(22) - CHAPTER 7 (22): The Competitive Firm The...

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CHAPTER 7 (22): The Competitive Firm The Profit Motive : The basic incentive for producing goods and services is profit . Profit = total revenue – total costs. Other motives may include worrying about social status or recognition. Profit may encourage producers to produce the goods desired by the consumers and provide it at reasonable prices. Profit may encourage producers to damage the environment and produce inferior goods. The typical consumer in the US believes that 35 cents of every sales dollar goes to the product. In reality, average profit is 5 cents per sales dollar. What’s the profit margin for Service Corp International (SCI)? What type of company is SCI? 12 cents per one dollar of sales! Market Structure The size of a company’s profit depends on the market structure in which it operates A market structure is the number and relative size of individual firms in an industry. Market Power and Market Structure One Producer Two Producers Few producers Homogeneous Product Many producers with Many Producers. Or Differentiated Product Differentiated products homogeneous Free entry/exit Equilibrium Conditions : MR = MC MR = MC MR = MC MR = MC P = MC P=equation P=equation P=eq P=eq P=constant If the market structure is monopoly , then the firm is producing the entire supply of the product and its product dose not have a close substitute. This is an extreme case.
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At the other extreme is the case of perfect competition which is a market in which no buyer or seller has market power because each is very small. Prices are constant. In the US, there are 20 million businesses which fall between monopoly and perfect competition. The Nature of Perfect Competition A perfectly competitive industry has several characteristics: Many small firms I dentical or homogenous products (e.g. agricultural products). Very low barriers of entry (whether financial, legal or technological) to new firms in a certain industry . Small Firms : The individual firm is very small relative to the market and it cannot influence the market price. Thus in this case, the individual firm takes the prices as set by the market. Thus, the implication of “smallness” is that the perfectly competitive firm is a price taker and the price facing each firm is a constant. The Production Decisions under Perfect Competition Output and Resources: Since the price facing the perfectly competitive firm is constant, the implication is that the firm has the option of only d etermining the output level that maximizes profit. Profit = Total revenue –Total cost = TR – TC where _ _ TR = P*quantity sold = P*q. _ and the price P in this case is constant and q is variable. Thus, the firm should select the quantity sold (q*) in order to maximize profit.
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CHAPTER 7(22) - CHAPTER 7 (22): The Competitive Firm The...

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