Chapter 5

Chapter 5 - Economics 101 of the Market Chapter 5 Perfectly...

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Economics 101 Chapter 5: Perfectly Competitive Supply: The Cost Side of the Market -Introduction -Productivity increases in manufacturing easily justifies the more than fivefold increase in wages over the past 100 years -However, similar productivity increases have not occurred in many service industries. Yet, the wages in those industries have increased together with the wages in manufacturing! -The reason for this is that the wages in manufacturing are the opportunity costs for workers in services industries -In other words, suppliers must be paid enough to cover their opportunity costs -While suppliers would prefer to be paid more than their marginal opportunity costs, and they frequently are, the latter is the minimum that must be paid in order to voluntarily supply their products 1. Profit-Maximizing Firms and Perfectly Competitive Markets -Buyers and Sellers -Buyers and Sellers ask similar questions: -Buyers -“Should I buy another unit?” -Answer: Yes, but only if the marginal benefit exceeds the marginal cost -Sellers -“Should I sell another unit?” -Answer: Yes, but only if the marginal benefit (revenue) exceeds the marginal cost of making it -Profit Maximization -Profit -The difference between the total revenue a firm receives from the sale of its product minus all costs, explicit and implicit -Profit-Maximizing Firm -A firm whose primary goal is to maximize profits -Upward-Sloping Supply Curves -Suppliers first use the resources with the lowest opportunity costs -So, if output is increased then the price of the output must go up in order to compensate for the use of resources with higher opportunity costs -Therefore, in the short run, the firms’ supply curves are upward sloping -Perfect Competition -In a Perfectly Competitive Market, all sellers and buyers are Price Takers : -Each firm and buyer has no influence over the market price -Each firm and buyer only sells and buys a fraction of the market output -Each firm and buyer can sell and buy as much output as she wishes at the market price -A profiting maximizing firm in a perfectly competitive market behaves as if it can sell all its output – however much it decides to produce – at the existing market price -In other words, each firm in a perfectly competitive market behaves as if the demand curve which the firm faces is horizontal – i.e. infinitely elastic -Law of Diminishing Returns -Fixed Factor of Production : -An input whose quantity cannot be altered in the short run -Variable Factor of Production : -An input whose quantity can be altered in the short run -Production in the Short Run -Factor of Production : -An input used in the production of a good or service -Short Run : -A period of time sufficiently short that at least some of the firm’s factors of the production are fixed -Long Run : -A period of time sufficient length that all the firm’s factors of production are variable 2. Graphing the Relationships among Total, Average, and Marginal Values
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This note was uploaded on 01/08/2009 for the course ECON 101 taught by Professor Lemche during the Summer '05 term at UBC.

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Chapter 5 - Economics 101 of the Market Chapter 5 Perfectly...

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