Ch11-7e[1] - PERFECT COMPETITION 11 CHAPTER Objectives...

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PERFECT COMPETITION 11 CHAPTER
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Objectives After studying this chapter, you will able to Define perfect competition Explain how price and output are determined in perfect competition Explain why firms sometimes shut down temporarily and lay off workers Explain why firms enter and leave the industry Predict the effects of a change in demand and of a technological advance Explain why perfect competition is efficient
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Say Cheese! Dairy farming is a tough competitive business. Several thousand farms stretching from Vermont to California are piling up losses and many farmers are quitting. Some farms are switching from milk to cheese production. We study a fiercely competitive market in this chapter. We explain the changes in price and output as the firms in perfect competition respond to changes in demand and technological change.
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Competition Perfect competition is an industry in which: Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have no advantages over new ones. Sellers and buyers are well informed about prices.
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Competition How Perfect Competition Arises Perfect competition arises: When firm’s minimum efficient scale is small relative to market demand so there is room for many firms in the industry. And when each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm they buy from.
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Competition Price Takers In perfect competition, each firm is a price taker. A price taker is a firm that cannot influence the price of a good or service. No single firm can influence the price—it must “take” the equilibrium market price. Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic .
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Competition Economic Profit and Revenue The goal of each firm is to maximize economic profit , which equals total revenue minus total cost . Total cost is the opportunity cost of production, which includes normal profit . A firm’s total revenue equals price, P , multiplied by quantity sold, Q , or P × Q .
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Competition A firm’s marginal revenue is the change in total revenue that results from a one-unit increase in the quantity sold. Figure 11.1 illustrates a firm’s revenue curves.
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Competition Figure 11.1(a) shows that market demand and supply determine the price that the firm must take.
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Competition Figure 11.1(b) shows the demand curve for the firm’s product, which is also its marginal revenue curve.
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Competition Because in perfect competition the price remains the same as the quantity sold changes, marginal revenue equals price.
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Competition Figure 11.1(c) shows the firm’s total revenue curve.
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The Firm’s Decisions in Perfect Competition A perfectly competitive firm faces two constraints: A market constraint summarized by the market price and the firm’s revenue curves A technology constraint summarized by firm’s product curves and cost curves (like those in Chapter 10).
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Ch11-7e[1] - PERFECT COMPETITION 11 CHAPTER Objectives...

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