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Chapter 22 Competitive Price Taker Markets

Chapter 22 Competitive Price Taker Markets - The...

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Unformatted text preview: The Competitive “Ideal” Competitive Price-Taker Markets “Pure” or “Perfect” Competition Competitive price-taker model (or market): Also commonly called Perfect or Pure Competition What the text refers to as the “Competitive Ideal ” Based on the “structure” concept model of ideal efficiency. Assumptions that the ideal structure concept is based on: Homogeneous products —no differentiation of products Numerous firms —hence no pricing power Free (or easy) entry and exit in the industry. Primary economic issue here: What is the profit- maximizing level of output and what does it tell us about the efficient use of resources ? Price Taker Given our assumptions, the firm faces a perfectly elastic (horizontal) demand curve. Why? No differentiation in products—hence no incentive for consumers to shop around for a better product. No pricing power due to the numerous number of firms— hence there is no incentive for producers to charge a higher or lower than the market price (P) . Hence the term “Price Taker” There is no reason to charge less than the market price and consumers would walk away if he charged more. Note that the typical firm in this industry is in a position to sell all it can at the market price. Horizontal demand curve The firm faces a horizontal demand curve at the market price (P). Hence d = P (lower case d to indicate not market D) For a firm, the lower case d is used rather than D which reflected the demand for the entire market. Hence d = P = MR The price of the product equals the marginal revenue (MR) that the firm earns with each additional unit of output sold. P Q q P Market Firm S D d Short-run rule for profit maximizing output: MC = MR Profit maximization or loss minimization assumed....
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Chapter 22 Competitive Price Taker Markets - The...

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