...Perfectly Competitive Markets A firm’s decision about how much to produce or what price to charge depends on how competitive the market structure is. If the Dangote cement raise their prices by 5%, there will be a small reduction in the quantity of cements demanded. If the conoil gas station raises its gasoline prices by 5%, there will be a huge reduction in the gas demanded. In a very competitive market like the local gasoline market, a single station has very little choice in what price to charge. If the station is busy there is no reason to lower the price, but if it raises its price by 10 cents a gallon, it will have almost no customers. We will study the extreme case of perfect competition, where firms are “price takers.” In a perfectly competitive market, (i) there are many buyers and sellers, so each buyer or seller is a price taker, (ii) all sellers supply the same, identical product. This is the model of supply and demand. If a seller could influence the price, it would not be acting according to a supply curve. In the long run, we also require that (iii) firms can freely enter or exit the market. Revenue of a Competitive Firm For a competitive firm, the price it receives does not depend on the quantity it chooses to sell. Marginal revenue equals the price of its output. For example, if the price is $6, then the total revenue of selling 10 units is $60 and the total revenue of selling 11 units is $66. Marginal revenue, ªTR/ªQ = (66-60)/(11-10)...
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...1. What are the characteristics of a perfectly competitive market? What are the implications for accounting profit in a perfectly competitive market? What about economic profit? Perfectly competitive markets are characterized by low sunk costs, perfect information, no entry or exit costs, no search costs, identical products and an infinite numbers of sellers. In a perfectly competitive market there are many firms and many buyers, all of which are price takers, meaning they have no control over prices. As price takers, firms face a highly (perfectly) elastic demand curve, meaning that they can only change revenue by changing the quantity produced. Firms in a perfectly competitive market will produce where MR = MC. Since firms are price takers, MR = Price. As a result, when marginal cost is equal to marginal revenue, it is also equal to price. If firms are realizing positive economic profits, other firms with similar cost structures will have an incentive to enter the market: one competitive firm’s economic profits indicate that production of that good is more profitable than any other available allocation of resources, causing other firms to invest. Once new firms enter the market, there is an increase in the MARKET, or AGGREGATE supply which will change the price that individual firms face, causing a reduction in the price. Firms will enter until economic profits are zero, at which point the intersection of the price and the marginal cost intersects the minimum of...
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... While on the website, you may wish to explore all the new information we have posted over the last several weeks, under the MORE tab. Things like Discounts, Local Insights, Getting Around, etc… Therefore, please call her when you land. If you are driving in, please simply call her when you are about 2 hours away… Late Check-In? If you arriving after 5:00PM, Lisa will provide you (via text) the code on our lockbox. Please call her during the day to get this from her. We periodically change the combo so getting it the day of check-in will ensure you have the correct number. Getting to the Condo Physical Address: 107 North Harris St., Unit 101, Breckenridge, CO 80424 / Longbranch Condo Complex From Denver International Airport (DEN): Breckenridge is 104 miles (166km) from Denver International Airport. Take Interstate 70 west to exit 203, which is the exit for Frisco. Continue south on HWY 9 to Breckenridge. Breckenridge is 9 miles from Frisco. Directions to the condo – from the North (1-70 / Frisco): Approximately 8 miles after you turn off I-70, you will come to a red light intersection with a 7/11 on the corner. Continue straight, through the traffic circle to the next red light intersection. Continue straight for a short distance, until you come to Wellington (Pizzeria will be on the left). Take a left on Wellington and go to your first stop sign. Cross French and on the right you will see a large condo complex. The parking is the first thing you come to. Directions...
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...MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In a perfectly competitive market that is in long-run equilibrium, a permanent leftward shift in the market demand curve will cause A) firms to leave the industry in the long run. B) profits to fall in the short run. C) the price to fall in the short run. D) all of the above [pic] 2) In the above figure, if the price is $4 per unit, how many units will a profit maximizing perfectly competitive firm produce? A) 20 B) 0 C) 5 D) 30 3) In the long run, perfectly competitive firms earn zero economic profit. This result is due mainly to the assumption of A) a perfectly elastic market demand. B) unrestricted entry and exit. C) price taking by the firms. D) few buyers and sellers. 4) Which of the following conditions allows perfect competition to arise? A) Attempts by each firm to make their product different from products produced by other firms reinforces competition between firms. B) Sellers and buyers are well informed about available quantity but not prices. C) New firms must operate more efficiently in order to overcome the competitive advantage of existing firms. D) The minimum efficient scale of a single producer is small relative to the demand for the good or service. [pic] 5) The figure above shows a perfectly competitive firm. The firm is operating; that is, the firm has not shut down. The firm is A) earning a normal profit. ...
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...Exercise 9 Solution Chapter 11 Firms in Perfectly Competitive Markets 11.1 Perfectly Competitive Markets 1) Which of the following is not a characteristic of a perfectly competitive market structure? A) There are a very large number of firms that are small compared to the market. B) All firms sell identical products. C) There are no restrictions to entry by new firms. D) There are restrictions on exit of firms. Answer: D Comment: Recurring Diff: 1 Page Ref: 368/368 Topic: Market Structures Objective: LO1: Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve. AACSB: Reflective Thinking Special Feature: None 2) Which of the following is a characteristic of an oligopolistic market structure? A) There are few dominant sellers. B) Each firm sells a unique product. C) It is easy for new firms to enter the industry. D) Each firm need not react to the actions of rivals. Answer: A Comment: Recurring Diff: 1 Page Ref: 368/368 Topic: Market Structures Objective: LO1: Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve. AACSB: Reflective Thinking Special Feature: None 3) Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous products. C) sellers are price takers. D) a horizontal demand...
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...CONTENTS INTRODUCTION……………………………………………………………………...3 CHAPTER I Perfect Competition Market……………………………………………..5 1.1. Perfect Competition Market Characteristics ……..………………….5 1.2. Perfect Competition Supply and Demand…………………………...9 CHAPTER II Perfect Competition Short-Run Supply………………………………..13 2.1. Short-Run Production Alternatives of a Competitive Firm………... .13 2.2. Short-Run Equilibrium and Supply Curve ………………………… 23 CHAPTER III Perfect Competition Long-Run Supply………………………………29 3.1. Long-Run Equilibrium Conditions…………………………………..29 3.2. Long-Run Industry Supply Curve…………………………………...33 3.3. Perfect Competition Market Efficiency……………………………...36 CHAPTER IV Practical analysis……………………………………………………..41 CONCLUSIONS……………………………………………………………………...45 LITERATURE………………………………………………………………………...47 APPENDIX…………………………………………………………………………...49 INTRODUCTION The issue of supply in the perfect competition conditions is a rather complex topic. It comprises of many crucial points that I will try to identify and explain. Some of them will be caused by the perfect competitive conditions’ regulations of the general processes of the supply formation, profit maximization, equilibrium achieving and others, dictated by the characteristics of the perfect competition itself, such as a large number of small firms, identical products sold by all firms, perfect resource...
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...is a problem that is emerging in a market in which buyers and sellers are informed about all elements of monopoly that are absent and the market price of a commodity is not control by individual buyers and sellers. Perfect competition is simply looked as a market structure where competition is at its greatest possible level. According to Kirzner (2000), “Perfect competition therefore came to mean the situation in markets where each and every participant lacks any power whatever directly to influence product price or product quality”. Perfect competition is used to compare other and real-life market structures. A real life market structure such as agriculture is the industry that closely resembles a perfect competition. The four key characteristics of perfect competition are a large number of small firms, identical products sold by all firms, perfect resource mobility or the freedom of entry into and exit out of the industry, and perfect knowledge of prices and technology. These four characteristics basically describes that a perfectly competitive firm does not have any control over the market. A large number of small firms that produce identical products have a large number of perfect substitutes that exist for the output produced by any given firm. This means the demand curve for a perfectly competitive firm's output is perfectly elastic. Freedom of entry into and exit out of the industry means that capital and other resources are perfectly mobile and that it is not possible...
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...rather than be involved in a perfectly competitive market.’ Discuss. 1b) In May 2009 Intel was fined a record amount by the EU for predatory pricing. Assess how easy is it to conclude that Intel undertook predatory pricing? Contents I) 1a) ‘A firm would prefer to b a monopoly, rather than be involved in a perfectly competitive market.’Discuss-------------------------------P/1-P/5 1) Market Environment---------------------------------------P/1-P/2 2) Profit Maximization----------------------------------------P/2-P/5 3) Benefits on Research & Development -------------------P/5 II) 1b) In May 2009 Intel was fined a record amount by the EU for predatory pricing. Assess how easy is it to conclude that Intel undertook predatory pricing?----------------------------------------------------------------P/6-P/8 III) Reference & Bibliography---------------------------------------------P/9 Business Economics Assignment (UBNo.: 09034262) P/8 1a) ‘A firm would prefer to be a monopoly, rather than be involved in a perfectly competitive market.’ Discuss. A monopolist has sufficient control over the services or products its provides in determine significant terms in order to maximize profits. This is directly contrast a firm operating within perfectly competitive market. To a large extent, a firm would prefer to be a monopoly. If a firm can be a monopoly, they can have following three advantages over doing business in perfectly competitive market. 1) Market Environment The best way to...
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...Unit 3 The Perfectly competitive market is a market structure in which the competition level is very high (Mankiw, 2007). In this market structure, the knowledge is freely available to all buyers and sellers. The availability knowledge enables the consumers and producers to make rational decisions to maximize their profits. Market price is the particular price that buyers and sellers agree to use in the market at a given time. I formal markets, there are two types of prices. These are the selling price and the buying price. The price of the goods in the market determines the market structures (Economics Online, 2015). The increase market products depend on demand and supply. In a perfectly competitive market firm, the price of goods determines the profit. The average revenue is the revenue a firm generates by selling one unit of output. The market structure determines the relationship between the quantity of output and average revenue. In a perfectly competitive market, the average revenue equals both marginal revenue and the price. Both marginal revenue and the prices are constant. A business experiences marginal revenue when it sells one or more extra units of its output. Marginal revenue plays a crucial role in profit maximization decision making (Mankiw, 2007). Therefore, a perfectly competitive market increases its profit by equating marginal revenue. The marginal revenue and the total output rely on market structure. In a perfectly competitive market, the price and...
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...Dropbox when completed. 1. How does the demand curve faced by a perfectly competitive firm differ from the market demand curve in a perfectly competitive market? Explain. The demand curve is horizontal for a perfectly competitive firm and is driven by its price. When the price goes up, demand goes down. The market demand curve is the total quantity that individuals are willing to buy at any price, this is downward sloping which reflects the law of demand. 2. A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is $140. Output FC VC TC TR Profit/Loss 0 $90 $ 0 $90 $0 -$90 1 90 90 $180 $140 -$40 2 90 170 $260 $280 $20 3 90 290 $380 $420 $40 4 90 430 $520 $560 $40 5 90 590 $680 $700 $20 6 90 770 $860 $840 -$20 a. Complete the table. b. What level of output should the firm produce to maximize profits? Output at levels 3 and 4 will maximize profits. 3. How does the demand curve faced by a monopoly differ from the demand curve faced by a perfectly competitive firm? Explain. In a perfectly competitive firm the demand curve is perfectly elastic this makes it horizontal whereas a monopoly has a relatively inelastic demand curve which is downward sloping. 4. The following table provides market share information about the soft-drink industry. |Company ...
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...the following to answer questions 1-2: Figure and Table: Market for Taxi Rides 1.|(Figure and Table: Market for Taxi Rides) The figure represents a competitive market for taxi rides. If the government now imposes an excise tax of $4 per ride (causing the supply curve to shift upward by that amount), then the government will collect tax revenues of ________, which might be used for worthwhile purposes. However, there will be an excess burden (or deadweight loss) to society of ________ caused by this tax.| || || || D)|$24 million; $8 million| 2.|(Figure and Table: Market for Taxi Rides) The figure represents a competitive market for taxi rides. If the government now imposes an excise tax of $3 per ride (causing the supply curve to shift upward by that amount), then the government will collect tax revenues of ________, which might be used for worthwhile purposes, but there will be an excess burden (or deadweight loss) to society of ________ caused by this tax.| || || C)|$21 million; $4.5 million| || Use the following to answer questions 3-4: 3.|(Table: Market for Fried Twinkies) The government decides to tax fried Twinkies at a rate of $0.30 per Twinkie and collect that tax from the producers. Using the table, the consumers will pay ________ per Twinkie and buy ________ Twinkies after the tax.| A)|$1.20; 8,000| B)|$1.30; 7,000| C)|$1.40; 6,000| D)|$1.50; 5,000| 4.|(Table: Market for Fried Twinkies) The government decides to tax fried Twinkies...
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...• Question 1 2.5 out of 2.5 points Compared to a perfectly competitive industry, a single-price monopoly produces Answer Selected Answer: less output. Correct Answer: less output. • Question 2 2.5 out of 2.5 points A natural monopoly arises when Answer Selected Answer: the long-run average cost curve slopes downward as it crosses the demand curve. Correct Answer: the long-run average cost curve slopes downward as it crosses the demand curve. • Question 3 2.5 out of 2.5 points Paulette owns a pizza parlor. Her total cost schedule is in the above table. Her total fixed cost is equal to Answer Selected Answer: $20. Correct Answer: $20. • Question 4 2.5 out of 2.5 points The total product is 10 units. The average total cost is $30 and the average fixed cost is $10. What is the amount of the total variable cost? Answer Selected Answer: $200 Correct Answer: $200 • Question 5 2.5 out of 2.5 points Which of the following costs can be positive when output is zero? Answer Selected Answer: total fixed cost Correct Answer: total fixed cost • Question 6 2.5 out of 2.5 points At the Punjab Bakery, two workers can decorate 14 cakes in an hour and three workers can decorate 18 cakes in an hour. The marginal product of the third worker is Answer Selected Answer: 4 cakes and the average product for...
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...Nebrida Question 1: Use supply and demand analysis to show the effect of a (binding) price ceiling in the market for rental properties. * What are the possible negative effects due to this price ceiling? The possible negative effects of this price ceiling according to supply and demand analysis is that landlords would have less incentive to offer apartments, and so the supply of apartments would drop, causing a persistent shortage of rental housing. This price ceiling would also lead to inefficiency, meaning that the quality of the housing would lower. * What happens to the total surplus (total surplus = consumers’ surplus + producers’ surplus)? What happens to total surplus when a price ceiling is implemented is deadweight loss. Deadweight loss affects not just consumer and producer surplus, but total surplus. Deadweight loss is the loss in total surplus that occurs when an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity. Wasted resources, inefficient allocation to consumers, and inefficiently low quality lead to a loss of surplus over and above the deadweight loss. * Why do governments use price ceilings despite these negative effects? In some places, price ceilings, or rent control on apartments give a small minority of renters much cheaper than they would get in an unregulated market. Also, sometimes when price ceilings have been in effect for a long time, buyers and renters don’t know the difference...
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...13 Assume that a market was served by an industry which was perfectly competitive when one of the firms was able to gain exclusive control of an essential input so that all of the other businesses closed down leaving the owner of the raw material as the sole supplier in the industry. Assume that there is no change in the demand for the product and that all the costs of production remain the same. a. Use the demand and supply model to show if there is likely to be any significant inefficiencies in production and allocation of the economies resources when there is only a single firm supplying the industry. b. Are there any circumstances when the single firm can lead to an efficient allocation of resources? Give reasons for your answer. a. A perfectly competitive market is defined by the following assumptions: 1.There are many buyers and sellers 2.Firms produce a homogenous product 3.Buyers and sellers are fully informed about the price and availabilty of resorces and products 4.Firms enjoy free entry and exit from the market 5.All resources are completely mobile 6.Firms seek to maximise economic profit, and consumers seek to maximise total utility. In this market, individual participants have no control over the price, and are said to be price takers. An imperfectly competitve market is one in which firms have some ability to set their own price, and one form is the monoploy. A monoploy is a market in which a single firm...
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...competition and the competitive firm. It examines how businesses with a given market price make production decisions that help maximizing profit. Characteristics of Perfect Competition 1. Many firms, each is selling an identical product. Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic. 2. Large number of buyers who are indifferent from whom to buy 3. No barriers (restrictions) to entry or exit; it is relatively easy to get into the business 4. Each firm produces a very small share of the total output so that no individual firm has the market power to influence the market price of the good it produces. A perfectly competitive firm is a price taker; it takes the market price as given. 5. Firms already in the industry have no advantage over new entrants 6. Complete information is available to buyers and sellers are about price, demand, and supply in the market 7. Perfectly competitive firms earn zero economic profit in the long run (only normal profit) 1 Dr. Mohammed Alwosabi Econ 140 – Ch. 11 Market demand curve vs. firm demand curve It is important to distinguish between the market demand curve and the demand curve facing a particular firm. The equilibrium market price is determined by the interaction of market demand and market supply curves. The market demand curve for a product is downward sloping (less than infinite). The market supply curve is upward ...
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