Chapter%2012 - Competition Perfect competition is an...

This preview shows page 1 - 10 out of 52 pages.

1CompetitionPerfect competition is an industry in which:Many firms sell identical products to many buyers. Each buys or sells only a tiny fraction of the total quantity in the market.Sellers can easily enter into or exit from market.Established firms have no advantages over new ones.Sellers and buyers are well informed about prices.Sellers offer a standardized product.
2PerfectCompetitionWhen 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.In perfect competition, each firm is a price taker.Each firm’s output is a perfect substitutefor the output of the other firms, so the demand for each firm’s output is perfectly elastic.
3ExamplesScenario Competitive? Why or Why Not? Several stores in the mall sell hoodies. Each store’s hoodies reflect the style of that particular store. Additionally, some stores use higher-quality cotton than others, which is reflected in their price.There hundreds of high school students in need of algebra tutoring services. Dozens of companies offer tutoring services; parents view the quality of the tutoring at the different companies to be largely the same.
4ExamplesScenario Competitive?Why or Why Not?In a small town, there are four providers of broadband Internet access: a cable company, the phone company, and two satellite companies. The Internet access offered by all four providers is of the same speed. The government has granted the U.S. Postal Service the exclusive right to deliver mail.
5CompetitionEconomic Profit and RevenueThe goal of each firm is to maximize economic profit, which equals total revenueminus total cost.Total cost is the opportunity costof production, which includes normal profit.A firm’s total revenueequals price, P, multiplied by quantity sold, Q, or P×Q.A firm’s marginal revenueis the change in total revenue that results from a one-unit increase in the quantity sold.
6Competition(a) shows that market demand and supply determine the price that the firm must take.(c) shows the demand curve for the firm’s product, which is also its marginal revenue curve.(b) shows the firm’s total revenue curve.
7ExampleCardboard Inc. is one of the hundred perfectly firms that produce large cardboard boxes for moving. The graph below shows the market demand and supply curves. The equilibrium market is $20 per large cardboard box.
8ExampleThe demand curve that Cardboard Inc. faces is identical to which of its other curves? Check all that apply.Its marginal cost curveIts marginal revenue curveIts supply curveIts total revenue curve
9The Firm’s Decisions in Perfect CompetitionA 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

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture