Chapter 08 - 15.04.2011 1 Chapter 8 Competitive Firms and...

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Unformatted text preview: 15.04.2011 1 Chapter 8 Competitive Firms and Markets The love of money is the root of all virtue. George Bernard Shaw ECO N201 – Spring 2011 8-2 Chapter 8 Outline 8.1 Perfect Competition 8.2 Profit Maximization 8.3 Competition in the Short Run 8.4 Competition in the Long Run ECO N201 – Spring 2011 8-3 8.1 Perfect Competition • Market structure provides information about how firms operating in the market will behave; it is a function of: • the number of firms in the market • the ease with which firms can enter and leave the market • the ability of firms to differentiate their products from those of their rivals • Perfect competition is one type of market structure in which buyers and sellers are price takers. • Neither firms nor consumers can sell or buy except at the market price. • This is what most people mean when they talk about “competitive firms.” 15.04.2011 2 ECO N201 – Spring 2011 8-4 8.1 Perfect Competition • Perfect competition is a market structure in which: • there are a large number of firms • firms sell identical products • buyers and sellers have full information about prices charged by all firms • transaction costs , the expenses of finding a trading partner and completing the trade above and beyond the price, are low • firms can freely enter and exit the market • Examples: • Agricultural/commodities markets like wheat and soybeans • Building and construction ECO N201 – Spring 2011 8-5 8.1 Perfect Competition: Assumptions 1. Large number of firms • No single firm’s actions can raise or lower the price. • Individual firm’s demand curve is a horizontal line at market price. 2. Identical (homogeneous) products • If all firms are selling identical products, it is difficult for any firm to raise the price above the going market price charged by all firms. 3. Full information • Consumer knowledge of all firms’ prices makes it easy for consumers to buy elsewhere if any one firm raised its price above market price. 4. Negligible transaction costs • Buyers and sellers waste little time or money finding each other. 5. Freely entry and exit • Leads to large number of firms and promotes price taking. ECO N201 – Spring 2011 8-6 8.1 Competitive Firm’s Demand • Are perfectly competitive firms’ demand curves really flat? • A firm’s residual demand curve , D r ( p ), is the portion of the market demand that is not met by other sellers at any given price. • D(p) = market demand • S o (p) = amount supplied by other firms • If not perfectly horizontal, the residual demand curve of an individual firm is much flatter than market demand. 15.04.2011 3 ECO N201 – Spring 2011 8-7 8.1 Competitive Firm’s Demand ECO N201 – Spring 2011 8-8 8.2 Profit Maximization (in general) • Profit maximization in this class always refers to...
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Chapter 08 - 15.04.2011 1 Chapter 8 Competitive Firms and...

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