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469-10 - CHAPTER 10 PERFECT COMPETITION In previous...

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CHAPTER 10 - PERFECT COMPETITION In previous chapters, we have examined managerial decisions within (inside) the firm without regard to the firm's external environment or "market structure." For the next 5 chapters, we look at the market structure (industry) in which the firm competes. This area of economics is sometimes called "Industrial Organization." Four possible markets: Perfect Competition (price-takers), Monopolistic Competition (price- searchers), Oligopoly (a few firms dominate) and Monopoly (single seller), which vary according to: a. Number of firms in the industry b. Barriers to entry (exit) for new firms c. Degree to which firms can control price Government regulation of industry is determined partly by market structure. Regulation is supposed to guarantee maximum competition to protect consumers against anti-competitive practices like: restraint of trade, collusion, price-fixing, attempts to limit/eliminate competition, attempts to monopolize an industry, etc. For example: Sherman Antitrust Act, mergers have to be approved by FTC, government regulation of "natural monopolies" like utilities, cable TV, etc. PERFECT COMPETITION We start with Perfect Competition (PC), sometimes considered an ideal model of "friction-free capitalism." See Table 10.1 on p. 398, Perfect Competition: Many firms in the industry and no barriers to entry (exit). Extreme opposite of PC is Monopoly: 1 firm and high barriers to entry. Sound managerial decisions depend on thorough knowledge of market forces of Supply and Demand, because most firms are buying inputs in competitive markets and selling its output in competitive markets. Example: GM buys materials (steel, rubber, parts, etc.), labor, capital equipment in competitive markets, borrows money (bonds, bank loans) in competitive credit markets, raises equity capital in competitive capital markets, and sells its output in competitive retail markets for new vehicles. See graph p. 400, Figure 10.1, for market conditions for shoes in a local market. Q D = 13 - .2P Q S = -2 + .4P We can set Q D = Q S and solve for P*: 13 - .2P = -2 + .4P P* = $25 per pair of shoes Q* = 13 - .2 (25) = 8 thousand shoes $25 is the "market clearing" price, i.e. the price that clears the market. Market clearing = equilibrium = (Q D = Q S ) = no shortages = no surpluses. What if the price is P = $20 instead of P = $25? ECN 469: Managerial Economics Professor Mark J. Perry 1
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Q D = 9 thousand Q S = 6 thousand Therefore, Q D > Q S , the market does not clear, there is a ____________ of 3 thousand shoes. What if P = $30? Q S = 10 thousand Q D = 7 thousand Q S > Q D , and there is a ______________ of 3 thousand shoes. In the absence of artificial price controls, an unregulated market will move in the direction of market clearing, market equilibrium conditions. SHIFTS IN S and D: Changing market conditions will result in shifts in the S and D curves. For example , suppose there is an economic expansion in the local community, the D curve will INCREASE as in Figure 10.2 (p.
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