Bethel University Monopolies and Perfect Competition Market Structures The response to the facilitator’s original post should be a minimum of 250 words. Th

Bethel University Monopolies and Perfect Competition Market Structures The response to the facilitator’s original post should be a minimum of 250 words. The student’s initial post must be supported by at least 2 reference(s). Approved sources for this course include the course textbook and scholarly articles from the Bethel library databases. No other source information is acceptable. Everything must be in own words. In this week’s readings we learned about perfect competition and monopoly. Find real world
examples of each and apply the criteria for defining markets (number of producers, similarity
of production, barriers to entry) to those markets to determine how close they fit the textbook
definition.
12
c h a p t e r
t w e l v e
Firms in Perfectly
Competitive Markets
12.1 A Perfectly Competitive Market
12.2 An Individual Price Taker’s
Demand Curve
12.3 Profit Maximization
12.4 Short-Run Profits and Losses
12.5 Long-Run Equilibrium
12.6 Long-Run Supply
CHICAGO BOARD OF TRADE
At the Chicago Board of Trade (CBOT), prices are set by
thousands of buyers interacting with thousands of sellers.
The goods in question are standardized (e.g., grade A winter wheat) and
information is readily available. Every buyer and seller in the market
knows the price, the quantity, and the quality of the wheat available.
Transaction costs are negligible. For example, if a news story breaks on
an infestation in the cotton crop, the price of cotton will rise immediately. CBOT price information is used to determine the value of some
commodities
Wthroughout the world.
I
L
L
I
S
,
K
A
S
S
A
N
D
R
A
2
1
6
1
T
S
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
323
chapter 12?? Firms in Perfectly Competitive Markets
A firm must answer two critical questions: What price should we charge
for the goods and services we sell, and how much should we produce?
The answers to these two questions will depend on the market structure.
The behavior of firms will depend on the number of firms in the market, the ease with which
firms can enter and exit the market, and the ability of firms to differentiate their products
from those of other firms. There is no typical industry. An industry might include one firm
that dominates the market, or it might consist of thousands of smaller firms that each produce a small fraction of the market supply. Between these two end points are many other
industries. However, because we cannot examine each industry individually, we break them
into four main categories: perfect competition, monopoly, monopolistic competition, and
­oligopoly.
In a perfectly competitive market, the market price is the critical piece of information
that a firm needs to know. A firm in a perfectly competitive market can sell all it wants at the
market price. A firm in a perfectly competitive market is said to be a price taker, because it
cannot appreciably affect the market price for itsW
output or the market price for its inputs. For
example, suppose a Washington apple grower decides that he wants to get out of the family
I
business and go to work for Microsoft. Because he may be one of 50,000 apple growers in the
L the price of the apples, the production of
United States, his decision will not appreciably change
apples, or the price of inputs.
L
I
S
,
A Perfectly Competitive Market
12.1
K What is a price taker?
A
S
A Perfectly Competitive Market
S
This chapter examines perfect competition, a A
market structure characterized by (1) many
buyers and sellers, (2) identical (homogeneous)N
products, and (3) easy market entry and exit.
Let’s examine these characteristics in greater detail.
D
R
Many Buyers and Sellers
A buyers and sellers, perhaps thousands or
In a perfectly competitive market, there are many
conceivably millions. Because each firm is so small in relation to the industry, its production
decisions have no impact on the market—each regards price as something over which it has
2
no control. For this reason, perfectly competitive firms are called price takers: They must
take the price given by the market because their1influence on price is insignificant. If the price
of wheat in the wheat market is $5 a bushel, then
6 individual wheat farmers will receive $5 a
bushel for their wheat. Similarly, no single buyer of wheat can influence the price of wheat,
1 of wheat. We will see how this relationbecause each buyer purchases only a small amount
ship works in more detail in Section 12.2.
T
© Flying Colours
Ltd/Jupiterimages
What are the characteristics of a firm in a
perfectly competitive market?
Why do they call firms in a
perfectly competitive market
price takers?
S
Identical (Homogeneous) Products
Consumers believe that all firms in perfectly competitive markets sell identical (or homogeneous) products. For example, in the wheat market, we are assuming it is not possible to
determine any significant and consistent qualitative differences in the wheat produced by
different farmers. Wheat produced by Farmer Jones looks, feels, smells, and tastes like that
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
324
PART 4?? Households and Market Structure
Bruce Heinemann/Getty Images
produced by Farmer Smith. In short, a bushel of wheat is a bushel
of wheat. The products of all the firms are considered to be perfect
substitutes.
Easy Entry and Exit
Product markets characterized by perfect competition have no significant barriers to entry or exit. Therefore it is fairly easy for entrepreneurs to become suppliers of the product or, if they are already
producers, to stop supplying the product. “Fairly easy” does not
mean that any person on the street can instantly enter the business
but rather that the financial, legal, educational, and other barriers to
entering the business are modest, enabling large numbers of people to
overcome the barriers and enter the business, if they so desire, in any
Can the owner of this orchard charge a noticeably
given period. If buyers can easily switch from one seller to another
higher price for apples of similar quality to those
and sellers can easily enter or exit the industry, then they have met the
sold at the orchard down the road? What if she
W
perfectly competitive condition of easy entry and exit. Because of this
charges a lower price for apples of similar quality?
I entry, perfectly competitive markets generally consist of a
How many apples can she sell at the market price?
easy market
large number
L of small suppliers.
A perfectly competitive market is approximated most closely in highly organized marL commodities, such as the New York Stock Exchange or
kets for securities and agricultural
the Chicago Board of Trade. IWheat, corn, soybeans, cotton, and many other agricultural
products are sold in perfectly competitive markets. Although all the criteria for a perfectly
S
competitive market are rarely met, a number of markets come close to satisfying them.
What are the three
, don’t hold, it is important to note that studying the model
­characteristics of a perfectly
Even when all the assumptions
competitive market?
of perfect competition is useful because many markets resemble perfect competition—that
is, markets in which firms face highly elastic (flat) demand curves and relatively easy entry
and exit. The model also givesKus a standard of comparison. In other words, we can make
comparisons with the perfectly
Acompetitive model to help us evaluate what is going on in
the real world.
1.
S
S
A
SECTION QUIZ
N
D of sellers and a(n) ____ entry.
Perfectly competitive markets tend to have a ____ number
a. large; easy
R
b. large; difficult
A
c. small; easy
d. small; difficult
2
1
a. homogeneous; price takers
6
b. homogeneous; price searchers
c. substantially different; price takers
1
d. substantially different; price searchers.
T
Perfectly competitive markets have ____ sellers, each of which produces a ____ share of industry output.
S
2. In perfectly competitive markets, products are ____ and sellers are ____.
3.
a. few; substantial
b. few; small
c. many; substantial
d. many; small
(continued)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
325
chapter 12?? Firms in Perfectly Competitive Markets
S E C T I O N Q U I Z (Cont.)
4. Which of the following is false about perfect competition?
a. Perfectly competitive firms sell homogeneous products.
b. A perfectly competitive industry allows easy entry and exit.
c. A perfectly competitive firm must take the market price as given.
d. A perfectly competitive firm produces a substantial fraction of the industry output.
e. All of the above are true.
5. An individual, perfectly competitive firm
a. may increase its price without losing sales.
b. is a price maker.
c. has no perceptible influence on the market price.
d. sells a product that is differentiated from those of its competitors.
3. d
4. d
3.
2. a
2.
Answers: 1. a
1.
W
I
Why do firms in perfectly competitive markets involve homogeneous goods?
L
Why does the absence of significant barriers to entry tend to result in a large number of suppliers?
L are small relative to the market make them price takers?
Why does the fact that perfectly competitive firms
I
S
,
5. c
K
A
S
S
Why won’t individual price takers raise or
A Will the position of individual price takers’
lower their prices?
curves change when market price
N demand
changes?
Can individual price takers sell all they
D
want at the market price?
R
A Curve
An Individual Firm’s Demand
An Individual Price Taker’s
Demand Curve
In perfectly competitive markets, buyers and sellers must accept the price that the market
2 market price and output are determined by
determines, so they are said to be price takers. The
the intersection of the market supply and demand
1 curves, as seen in Exhibit 1(b). As we stated
earlier, perfectly competitive markets have many buyers and sellers and the goods offered for
6 or seller can influence the market price.
sale are essentially identical. Consequently, no buyer
They take the market price as given.
1
For example, no single consumer of wheat can influence the market price of wheat
T
because each buyer purchases such a small percentage of the total amount sold in the wheat
S
market. Likewise, each wheat farmer sells relatively
small amounts of almost identical
wheat, so the farmer has little control over wheat prices.
Individual wheat farmers know that they cannot dispose of their wheat at any figure higher than the current market price; if they attempt to charge a higher price, potential buyers will
simply make their purchases from other wheat farmers. Further, the farmers certainly would
not knowingly charge a lower price, because they could sell all they want at the market price.
Likewise, in a perfectly competitive market, individual sellers can change their outputs, and
it will not alter the market price. The large number of sellers who are selling identical products
12.2
Can an individual wheat
farmer influence the m
­ arket
price of wheat? Can an
­individual consumer of
wheat influence the market
price of wheat?
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
326
PART 4?? Households and Market Structure
section 12.2
exhibit 1
Market and Individual Firm Demand Curves in a Perfectly Competitive Market
a. Individual Firm Demand Curve
b. Market Supply and Demand Curve
Price
Market price
and output
determined
here.
$5
Firm’s Demand
Curve
S
$5
d
Firm is a price taker
—must take market price
© Cengage Learning 2013
0
100
0
200
D
150
W
Quantity of Wheat
(millions of bushels)
I
L can sell all the wheat he wishes. Because each proAt the market price for wheat, $5, the individual farmer
ducer provides only a small fraction of industry output, any additional output will have an insignificant impact
L
on market price. The firm’s demand curve is perfectly elastic at the market price.
I
S
make this situation possible. Each producer provides such a small fraction of the total supply
that a change in the amount he, offers does not have a noticeable effect on market equilibrium
Quantity of Wheat
(bushels)
Why is the perfectly
­competitive firm’s demand
curve perfectly elastic?
price. In a perfectly competitive market, then, an individual firm can sell as much as it wishes to
place on the market at the prevailing price; the demand, as seen by the seller, is perfectly elastic.
K
It is easy to construct the demand
curve for an individual seller in a perfectly competitive
market. Remember, she won’t A
charge more than the market price because no one will buy it,
and she won’t charge less because she can sell all she wants at the market price. Thus, the
S
farmer’s demand curve is horizontal over the entire range of output that she could possibly
S price of the product is $5, the farmer’s demand curve will be
produce. If the prevailing market
represented graphically by a horizontal
line at the market price of $5, as shown in Exhibit 1(a).
A
In short, both consumers and producers are price takers in the perfectly competitive
N part, are price takers. Consumers cannot generally affect
market. Consumers, for the most
the the prices they pay. However,
D in a number of market situations the producer can affect
the market price and we will study those in the following chapters.
R
A
A Change in Market Price and the Firm’s
Demand Curve 2
1
What happens to the
­perfectly competitive firm’s
demand curve if there is an
increase in the market price?
To say that under perfect competition producers regard price as a given is not to say that
price is constant. The position6of the firm’s demand curve varies with every change in the
market price. In Exhibit 2, we1see that when the market price for wheat increases, say as a
result of an increase in market demand, the price-taking firm will receive a higher price for
T
all its output. Or when the market price decreases, say as a result of a decrease in market
demand, the price-taking firmS
will receive a lower price for all its output.
In effect, sellers are provided with current information about market demand and supply
conditions as a result of price changes. It is an essential aspect of the perfectly competitive
model that sellers respond to the signals provided by such price movements, so they must
alter their behavior over time in the light of actual experience, revising their production decisions to reflect changes in market price. In this respect, the perfectly competitive model is
straightforward; it does not assume any knowledge on the part of individual buyers and sellers about market demand and supply—they only have to know the price of the good they sell.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
327
chapter 12?? Firms in Perfectly Competitive Markets
section 12.2
exhibit 2
Market Prices and the Position of a Firm’s Demand Curve
$6
d2
$6
$5
d1
$5
D1
0
0
Quantity
(firm)
D2
Q1 Q2
Quantity
(market)
The position of the firm’s demand curve will vary with every change in the market price.
1.
W
I
L
L
I
SECTION QUIZ
S
Which of the following is false?
,
a. A perfectly competitive firm cannot sell at any price higher than the current market price and would not
knowingly charge a lower price, because it could sell all it wants at the market price.
K
A
d. The perfectly competitive model does not assume any knowledge on the part of individual buyers and sellers
Shave to know the price of the good they sell.
about market demand and supply—they only
S competitive firm’s demand curve shifts ____________.
When market demand shifts ____________, a perfectly
a. rightward; upward
A
b. rightward; downward
N
c. leftward; upward
D
d. leftward; downward
R
e. Both (a) and (d) are correct.
A curve shift?
When will a perfectly competitive firm’s demand
b. In a perfectly competitive market, individual sellers can change their output without altering the market price.
c. In a perfectly competitive industry, the firm’s demand curve is downward sloping.
2.
3.
a. never
2
c. when new producers enter the industry in large
1 numbers
d. when either (b) or (c) occurs
6
In a market with perfectly competitive firms, the market demand curve is ____________ and the
1
demand curve facing each individual firm is ____________.
a. upward sloping; horizontal
T
b. downward sloping; horizontal
S
b. when the market demand curve shifts
4.
c. horizontal; downward sloping
d. horizontal; upward sloping
e. horizontal; horizontal
(continued)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
Price
S
328
PART 4?? Households and Market Structure
S E C T I O N Q U I Z (Cont.)
1. Why would a perfectly competitive firm not try to raise or lower its price?
2. Why can we represent the demand curve of a perfectly competitive firm as perfectly elastic (horizontal) at the
­market price?
3. How does an individual perfectly competitive firm’s demand curve change when the market price changes?
4. If the marginal cost facing every producer of a product shifted upward, would the position of a perfectly competitive
firm’s demand curve be likely to change as a result? Why or why not?
Answers: 1. c
2. e
3. c
4. b
12.3
W
I
L
L
I
S
,
Profit Maximization
What is total revenue?
What is average revenue?
What is marginal revenue?
Why does the firm maximize profits where
marginal revenue equals marginal cost?
Revenues in a Perfectly Competitive Market
The objective of the firm is to K
maximize profits. To maximize profits, the firm wants to produce the amount that maximizes the difference between its total revenues and total costs. In
A
this section, we will examine the different ways to look at revenue in a perfectly competitive
market: total revenue, averageSrevenue, and marginal revenue.
total revenue (TR) the
product price times the
quantity sold
S
Total Revenue A
N
Total revenue (TR) is the revenue that the firm receives from the sa…
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