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ECON 208 CH9 Competitive Markets.pdf

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Economics (Arts)
ECON 208
Michel Lapointe

ECON 208 Introduction To Microeconomics Introduction To Microeconomics Chapter 9 Competitive Markets A market is said to have a competitive structure when its firms have little or no market power The more market power the firms have the less competitive is the market structureMarket Power the ability of a firm to influence the price of a product or the terms under which it is soldThe significance of a market structureTo understand the behaviour of an individual firmEvaluate the overall efficiency of market outcomesFirms Max ProfitTotal RevenueTotal CostsIndividual firm demand curveIndustry demand curveFrom the industry demand curve we can infer firms demand curveThe competitiveness of a market the influence that individual firms have on market pricesThe less power an individual firm has the more competitive is the structure of the marketZero Market PowerExtreme formPerfectly competitive marketFirms able to sell as much as they want at the prevailing priceThe term competitive behaviour refers to the degree to which individual firms actively vie with one another for businessExample GM and Toyota engage in competitive behaviour but their market is not competitiveTwo wheat farmers do not engage in competitive behaviour but the both exist in a very competitive marketPerfect Competition a market structure in which all firms in an industry are price takers and in which there is freedom of entry into and exit from the industryAssumptions Of Perfect Competition 1 All firms sell a homogenous product ie every unit is identical for purchasers 2 Consumers know the product and each firms price 3 Each firm reaches its minimum LRAC at a level of output that is small relative to the industrys total output a 12 and 3 imply that the firm in a price taker
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