10-CompetitiveMarkets

10-CompetitiveMarkets - 10. Firms in Competitive Markets...

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Unformatted text preview: 10. Firms in Competitive Markets (Chapter 14) Introductory Microeconomics, Mankiw et al. 5th Canadian Edition Introduction to Microeconomics (ECO 1104A) University of Ottawa Spring/Summer 2011 2 Look for answers to these questions: 1. What is a perfectly competitive market? 2. What is marginal revenue? How is it related to total and average revenue? 3. How does a competitive firm determine the quantity that maximizes profits? 4. When might a competitive firm shut down in the short run? Exit the market in the long run? 5. What does the market supply curve look like in the short run? In the long run? 3 Introduction: A Scenario Three years after graduating, you run your own business. Your decisions include: how much to produce? what price to charge? how many workers to hire, etc.? What factors should affect these decisions? Your costs? (studied in preceding chapter) How much competition you face? We begin by studying the behavior of firms in perfectly competitive markets. Market Structures Characteristics Examples Monopoly One seller No close substitutes electricity Cable-TV Oligopoly Few sellers similar or identical products Banks Gasoline Monopolistic Competition many sellers Differentiated products Novels Films Perfect Competition many many sellers and buyers identical products Wheat (other crops) milk Seller Profits () in the long and short run: A summary (short term) i) > $0 ii) = $0 iii) < $0 (losses cannot exceed the sellers total fixed cost) (long term) = $0 Profit Economic (not accounting) 6 Sellers Short Term Decisions 1. Produce goods and services Decide on production level (at a given price) without the flexibility to adjust its production capacity (size of plant); OR 2. Shutdown: stop producing goods and services (without leaving the industry) Assume total fixed costs Goal: Maximise profits or minimise costs 7 Sellers Long Term Decisions 1. Produce goods and services Select production level (output) for a given price level Adjust production capacity to produce at lowest cost possible; OR 2. Exit: Stop production and leave industry No fixed costs 8 Characteristics of Perfect Competition 1. Many buyers and many sellers 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. Because of 1 & 2, each buyer and seller is a price taker, that is, takes the price as given. The Revenue of a Competitive Firm Total revenue ( TR ) Average revenue ( AR ) Marginal Revenue ( MR ): The change in TR from selling one more unit....
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This note was uploaded on 01/21/2012 for the course ECO 1104 taught by Professor Crabbe during the Winter '08 term at University of Ottawa.

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10-CompetitiveMarkets - 10. Firms in Competitive Markets...

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