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blanchard_ch10 - 000200010270728684_CH10_p195-220.qxd 4:13...

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After studying this chapter, you will be able to: Define perfect competition Explain how a firm makes its output decision and why it sometimes shuts down temporarily and lays off its workers Explain how price and output are determined in a perfectly competitive market Explain why firms enter and leave a competitive market and the consequences of entry and exit Predict the effects of a change in demand and of a technological advance Explain why perfect competition is efficient A n Iowa corn farmer must make many decisions, but figuring out the price to charge for his corn is not one of them. Corn farmers must accept the price determined by supply and demand. The producers of most crops—among them wheat, rice, soybean, sugarbeet, and coffee—must also accept the prices that markets determine. During the booming economic conditions of 2006 and 2007, crop prices and production soared. Then, following the global financial crisis of 2008 prices sagged, but for many crops production kept rising. What are the forces that brought these changes in prices and production in the world’s markets for farm products? We’re going to answer this question by studying competitive markets and building a model of a market in which competition is as fierce and extreme as possible. We call this situation perfect competition. In Reading Between the Lines at the end of the chapter, we’ll apply the model to the global market for corn and see how changes in demand and fortunate weather bring changes in prices and quantities produced in this key global agricultural market. PERFECT COMPETITION 10 195
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196 CHAPTER 10 Perfect Competition What Is Perfect Competition? The firms that you study in this chapter face the force of raw competition. We call this extreme form of com- petition perfect competition. Perfect competition is a market in which Many firms sell identical products to many buyers. There are no restrictions on entry into the market. Established firms have no advantage over new ones. Sellers and buyers are well informed about prices. Farming, fishing, wood pulping and paper milling, the manufacture of paper cups and shopping bags, grocery and fresh flower retailing, photo finishing, lawn services, plumbing, painting, dry cleaning, and laundry services are all examples of highly competi- tive industries. How Perfect Competition Arises Perfect competition arises if the minimum efficient scale of a single producer is small relative to the mar- ket demand for the good or service. In this situation, there is room in the market for many firms. A firm’s minimum efficient scale is the smallest output at which long-run average cost reaches its lowest level. (See Chapter 9, p. 188.) In perfect competition, each firm produces a good that has no unique characteristics, so consumers don’t care which firm’s good they buy.
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