Economic 2

Economics block 2 - Micro

Chapter 11 – pure competition in the short run

 CHAPTER OUTLINE

1. The price a firm charges for the good or service it produces and its output of that product depend not only on the demand for and the cost of producing it, but on the characteristics of the market (industry) in which it sells the product. The four market models are pure competition, pure monopoly, monopolistic competition, and oligopoly. These models are defined by the number of firms, whether the product is standardized or differentiated, the firm's control over price, the conditions for entry into the industry, and degree of nonprice competition (see Table 8.1 in text). Compared with pure competition, the other three market models are considered different forms of imperfect competition.

2. This chapter examines pure competition, in which a very large number of independent firms, no one of which is able to influence market price by itself, sell a standardized product in a market where firms are free to enter and to leave in the long run. Although pure competition is rare in practice, it is the standard against which the efficiency of the economy and other market models can be compared.

3. Demand as seen by the purely competitive firm is unique because a firm selling its product cannot influence the price at which the product sells, and therefore is a price taker.

a. The demand for its product is perfectly elastic.

b. There are 3 types of revenue. 

* Average revenue is the amount of revenue per unit of output. 

* Total revenue is calculated as the price times the quantity a firm can produce. 

* Marginal revenue is the change in total revenue from selling one more unit.

* Average revenue (or price) and marginal revenue are equal and constant at the fixed (equilibrium) market price (AR = P = MR).

* TR -Total revenue increases at a constant rate as the firm increases its output.

c. The demand (average revenue) and...