格里高利经济学精要·辅导gregory_sg06

Chapter 6

Competitive Markets

After reading Chapter 6, COMPETITIVE MARKETS, you should be able to:

List and explain the characteristics of Perfect Competition and Monopolistic Competition

Explain why a perfectly competitive firm cannot set its own price and must charge the market price. Explain how a perfectly competitive firm decides how much output to produce in order to maximize profits.

Derive the supply curve for a perfectly competitive firm and industry.

Discuss the short-run and long-run market equilibrium for a perfectly competitive industry. Describe the equilibrium for a Monopolistic Competitive Firm.

Explain the benefits for society from competitive industries

List and discuss policies that have been used to promote competition, such as Deregulation, Anti-Trust Laws, and removal of restrictive licensing requirements and work rules.

T Outline

I. Competitive Markets

A) Perfect Competition is a market with the following characteristics:

1. The product’s price is the same for each buyer and seller. Each firm is a Price Taker.

2. The product is homogeneous.

3. Buyers and sellers have perfect information about prices and product qualities.

4. There are a large number of buyers and sellers.

5. There is freedom of entry into and exit from the industry.

B) Monopolistic Competition is a market with the same characteristics as perfect competition

except:

1. The product’s price is different for each seller.

2. Each firm produces a slightly different product.

II. The Firm and the Market: Perfect Competition

A) The market demand curve is downward sloping.

B) The firm’s demand curve is horizontal or perfectly elastic. Since each firm has only a tiny share

of the total market, it can sell all the output it wishes at the going market price.

Chapter 6 Competitive Markets 57

III. The Competitive Firm in the Short Run

A) Marginal Revenue (MR) is the increase in total revenue from selling an additional unit of

output. The marginal revenue a perfectly competitive firm receives for the sale of an extra unit

of output is the price of the good, that is, MR = P.

B) A firm maximizes its profits by producing just enough output so that marginal revenue equals

marginal cost. Since MR = P for a perfectly competitive firm, it produces a level of output where

marginal cost equals price, P = MC. This is illustrated below, where the firm produces Q and

charges the going price P

.

D) In the short run, a perfectly competitive firm can earn:

1. an economic profit when price is greater than min ATC.

2. a normal profit when price is equal to min ATC.

3. an economic loss when price is less than min ATC.

E) The supply curve of a perfectly competitive firm is its marginal cost curve above the minimum

average variable cost curve because this shows the amount of the firm’s production at any

potential price. If the price is less than the average variable cost, the firm minimizes its losses by

shutting down.

F) The market supply curve is the horizontal summation of all the supply curves of each firm. The

market equilibrium, which determines the equilibrium price, is where the market demand curve

and market supply curves cross.

IV. Long Run Adjustments

A) In the long run, new firms can enter the industry, existing firms can expand output, and/or firms

can exit the industry.

1. If firms are earning an economic profit new firms will enter the industry. This will increase

supply and drive the market price down.

2. If firms are earning an economic loss firms will exit the industry. This will reduce supply and

drive the market price up.

58 regory Essentials of Economics, Sixth Edition

B) In the long run, firms in a perfectly competitive industry:

1. earn zero economic profits; that is, they earn a normal profit.

2.

produce where average costs are minimized.

V. Monopolistic Competition

A) An industry characterized by monopolistic competition is like a perfectly competitive industry

with the exception that each producer sells a product slightly different from the other sellers and

each firm can set its own price.

B) Each firm sells a product differentiated from other producers, so the firm’s demand curve is

slightly downward sloping.

C) In the long run, each monopolistic competitive firm earns zero economic profits since there is

free entry and exit.

D) Unlike perfect competition, however, in the long run monopolistically competitive firms

produce where output is less than minimum efficient scale.

VI. Policies to Promote Competition

A) Perfectly competitive industries benefit society by pushing the price of the product down so that

the price just covers the lowest cost of production. Output is produced at minimum efficient

scale.

B) A number of policies have been followed to help promote competition:

1. Removal of Trade Barriers provides additional competition for domestic firms by allowing

more foreign firms to enter the market.

2. Deregulation, the elimination of government regulatory controls over an industry,

substitutes competition among firms for government policies that stifle competition.

3. Antitrust Laws set the legal rules businesses must obey and are designed to help foster

competition.

4. Reducing Restrictive Licensing Requirements and Work Rules removes constraints that

help limit the extent of competition.

Chapter 6 Competitive Markets 59

T Review Questions

True/False

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