FSU ECO 2023 - CHAPTER 14: PERFECT COMPETITION

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CHAPTER 14 PERFECT COMPETITION Four market types 1 Perfect competition 2 Monopoly 3 Monopolistic competition 4 Oligopoly Perfect Competition Many firms sell an identical product to many buyers There are no barriers to entry into or exit from the market Established firms have no advantage over new firms Sellers and buyers are well informed about prices Other Market Types personal computer Monopolistic competition Oligopoly Monopoly Microsoft has a near monopoly in producing the operating system for a 14 1 A Firm s profit maximizing choices 1 Price Taker a firm that cannot influence the price of the good or service it produces a The producers of most agricultural products 2 Revenue Concepts In perfect competition market demand and market supply determine the price a b Marginal revenue the change in total revenue that results from a one unit increase in price i ii TR price x quantity sold In perfect competition marginal revenue price 3 Profit Maximizing Output cost curves 4 Marginal Analysis and the Supply Decision a One way to find the profit maximizing output is to use a firm s total revenue and total a b c If MR MC then the revenue from selling one more unit exceeds the cost of producing that unit and an increase in output increases economic profit If MR MC then the revenue from selling one more unit is less than the cost of producing that unit and a decrease in output increases economic profit If MR MC then the revenue from selling one more unit equals the cost incurred to produce that unit d Other things remaining the same the higher the price of a good the greater is the quantity supplied of that good 5 Temporary Shutdown Decision a Loss When Shut Down If a firm shuts down it incurs an economic loss equal to total fixed cost i ii This loss is the largest that a firm need incur b Loss When Producing i The firm incurs an economic loss equal to TFC plus TVA minus TR c The Shutdown Point the point at which price equals minimum average variable cost and the quantity produced is that at which average variable cost is at its minimum 6 The Firm s SR Supply Curve a A perfectly competitive firm s SR supply curve shows how the firm s profit maximizing output varies other things remaining the same i Based on the marginal analysis and shutdown decision 14 2 Output Price and Profit in the SR 1 Market Supply in the SR 2 SR Equilibrium in Normal Times a Shows the quantity supplied at each price by a fixed number of firms a Market demand and market supply detrimine the price and quantity bought and sold b SR equilibrium in which a firm earns zero economic profits is just one of three possible situations A competitive market might also deliver a positive economic profit or an economic loss a The market forces that shift the supply curve and move the price to minimum average 14 3 Output Price and Profit in the LR 1 Entry and Exit total cost in the LR In the LR firms make zero economic profit b c The Effects of Entry d The Effects of Exit 2 Change in Demand 3 Technological Change i Economic profit is an incentive for new firms to enter a market but as they do so the price falls and the economic profit of each existing firm decreases i Economic loss is an incentive for firms to exit a market but as they do so the price rises and the economic loss of each remaining firm decreases a A decrease in demand triggers a similar response except in the opposite direction The decrease in demand brings a lower price economic loss and exit Exit decreases market supply raises the price and eliminate the economic loss a Firms are constantly discovering lower cost techniques of production b Because competition eliminates economic profit in the LR technological change brings only temporary gains to firms


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FSU ECO 2023 - CHAPTER 14: PERFECT COMPETITION

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