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If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. OUTLINE -- LESSONS 8/9a, 8/9b 8/9a Pure Competition - Characteristics and Short Run EquilibriumI. Benefit-Cost Analysis and Producer Decisions A. Decision: How Many to Produce: II. The Product Market A. Circular Flow Model C. General Outline for Each Model1. Characteristics and Examples III. Pure Competition. A. DefinitionA market structure in which a very large number of firms sell a standardized product into which entry is very easy in which the individual seller has no control over the product price and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers. IV. Short Run Profit Maximization: Benefit-Cost Analysis Approach A. Benefit-Cost Analysis1. definitionthe selection of ALL possible alternatives where the marginal benefits are greater than the marginal costselect all where: MB > MC How to find the profit maximizing quantity:A firm will maximize its profit (or minimize its losses) by producing that output at which marginal revenue and marginal cost are equal provided product price is equal to or greater than average variable cost C. Three Cases -- using BOTH cost schedules and graphs1. profit maximizing casea) step 1: find quantity where MR = MC
2. loss minimizing casea) step : find quantity where MR = MC V. Profit Maximization: total cost minus total revenue approach A. Short Run 8/9b Pure Competition - Long Run Equilibrium and EfficiencyVI. Pure competition in the Long Run A. Assumptions From the Textbook: IF DEMAND INCREASES, PRICE WILL INCREASE NEW FIRMS WILL ENTER AND PRICE WILL FALL BACK TO WHERE IT WAS 2. exodus of firms eliminates losses From the Textbook: IF DEMAND DECREASES, PRICE WILL DECREASE FIRMS WILL GO OUT OF BUSINESS AND PRICE WILL RISE BACK TO WHERE IT WAS D. Pure competition: Long-run equilibrium graph
VII. Pure Competition and Efficiency !!!!!!!!!!!!!!!! A. Competitive Markets Used as Standard of Efficiency -- The "Invisible Hand" of Capitalism How to find the productively efficient quantity:Society will achieve productive efficiency by producing that output at which the average total cost (ATC) is at a minimum C. Purely competitive firms achieve Allocative Efficiency1. definitionThe apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers);
VIII. Advantages and Disadvantages of the Competitive Price System [From: http://www.economicshelp.org/microessays/markets/efficiency-pc.html] Which of the following explains why a purely competitive firm's demand curve is perfectly elastic?Which of the following reasons explains why the purely competitive firm's demand curve is perfectly elastic? Because the individual firm is a price taker, the marginal revenue curve coincides with the firm's equilibrium price.
Why purely competitive industry is purely elastic?All goods in a perfectly competitive market are considered perfect substitutes, and the demand curve is perfectly elastic for each of the small, individual firms that participate in the market. These firms are price takers–if one firm tries to raise its price, there would be no demand for that firm's product.
What is the demand curve of a purely competitive firm?A perfectly competitive firm's demand curve is a horizontal line at the market price. This result means that the price it receives is the same for every unit sold. The marginal revenue received by the firm is the change in total revenue from selling one more unit, which is the constant market price.
How does pure competition relate to elasticity?Few markets as a whole are perfectly elastic, where consumers would buy whatever quantity was supplied without affecting the market price. However, sellers in a purely competitive market see a perfectly elastic demand — they can sell any quantity of the product at the market price.
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