Economics_Chapter_11_Study_Guide

Economics_Chapter_11 - Karlee Novice Economics Chapter 11 Study Guide 1 Introduction a Firms in perfectly competitive industries are unable to

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Karlee Novice Economics Chapter 11 Study Guide 1) Introduction a) Firms in perfectly competitive industries are unable to control the prices of the products they sell and are unable to earn an economic profit in the long run. There are two main reasons for this: i) They sell identical products ii) It is easy for new firms to enter these markets b) Most industries are not perfectly competitive because they do not produce identical products and it is difficult for firms to enter c) All industries have the same three key characteristics: i) The number of firms in the industry ii) The similarity of the good or service produced by the firms in the industry iii) The ease with which new firms can enter the industry Market Structure Characteristics Perfect Competition Monopolistic Competition Oligopoly Monopoly Number of firms Many Many Few One Type of Product Identical Differentiated Identical or differentiated Unique Ease of entry High High Low Entry blocked Examples of industries -Wheat -Apples -Selling DVDs -Restaurants -Manufacturing computers -Manufacturing automobiles -First-class mail delivery -Tap water 2) Perfectly Competitive Markets a) Perfectly competitive market is a market that meets 3 conditions: i) There must be may buyers and many firms, all of whom are small relative to the market ii) The products sold by all firms in the market must be identical iii) There must be no barriers to new firms entering the market b) Ex: selling apples i) No buyer or seller buys and sells more than a tiny fraction of the total apple crop ii) All apples are identical iii) Anyone can buy land, plant apple trees and sell them. c) Not many markets fall under the category of perfectly competitive d) A Perfectly Competitive Firm Cannot Affect the Market Price i) The actions of consumers of rims have no effect on the market price of products in a perfectly competitive market. ii) Since there are so many firms selling the identical products if one firm raises it prices than consumers will just buy the product from a different firm.
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iii) Price taker is a buyer or seller that is unable to affect the market. iv) The market price of wheat is determined not by any individual wheat farmer but by the interaction in the wheat market of all the buyers and all the sellers. e) The Demand Curve for the Output of a Perfectly Competitive Firm i) The demand curve for a perfectly competitive market is a horizontal line. ii) The demand curve of wheat for an individual seller in a perfectly competitive market is COMPLETELY DIFFFERNT than the market demand curve for wheat. iii) The market demand curve for wheat is the interaction between the buyers and sellers, which ultimately determines the price for wheat. Once this price is determined that is the price that all the individual sellers (ie Farmer Whaple can sell) iv) Key point: Individual sellers of wheat like Farmer Whaples’s output of wheat is very small relative to the total market output. 3) How a Firm Maximizes Profit in a Perfectly Competitive Market
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This note was uploaded on 04/07/2008 for the course ECO 001 taught by Professor Gunter during the Spring '06 term at Lehigh University .

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Economics_Chapter_11 - Karlee Novice Economics Chapter 11 Study Guide 1 Introduction a Firms in perfectly competitive industries are unable to

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