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Chapter 9 Notes.docx

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Kalina Staub

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ECO100: Chapter 9 Notes – Competitive Markets Today we will begin looking at different market structures and how different market structures affect market outcomes. Market Structure is the combination of all features that may affect the behavior and performance of firms in a market (e.g. the _______________________ of firms, type of product, level of _________________________________________, ease of market entry, etc.) Some types of different market structures include: Market structures are typically defined by the level of ____________________ that each firm in the market possesses. In chapter 6, we learned how to derive market demand curves from individuals budgets and preferences. Now we need to know what types of demand curve each individual firm faces. Market structure will affect the shape of the ______________________________ curves faced by individual firms. Perfect Competition There are 4 main assumptions underlying perfectly competitive markets: 1. ____________________ products 2. Consumers have ______________________________ about the product being sold and the prices charged by each firm 3. Each firm has an ________________________________________share of the market. 4. There are no __________________________________________ We say that perfectly competitive firms are _____________________________ since they have no market power and can produce and sell as much or as little of its product as it wants without altering the market price of the product in any way. This means that the demand curve faced by each individual firm is horizontal or ____________________________________ at the market price (Though the market demand curve is still ___________________________). Last week, we learned how to draw a firm’s cost curves, so now we need to think about their revenues.  Total Revenue (TR) =    Average Revenue (AR)=    Marginal Revenue (MR) =  When firms are price-takers, _______________________________________________________ The Firm’s Short-Run Decisions If the firm decides not to produce any output, in the short-run, they will still have to pay their fixed costs. We call these fixed costs _____________________________ in the short-run since the firm will not be able to recoup them regardless of how much they decide to produce. This is a very difficult concept for people to grasp. Example Suppose you paid $50 for non-refundable and non-exchangeable tickets to go see a comedy show tomorrow and your friend calls you and says she has an extra ticket to go see your favorite band that she would sell to you for $40. You expect to get $50 worth of enjoyment out of the comedy show and $100 worth of enjoyment out of going to see your favorite band. Should you go to the comedy show or to see the band? The process is similar for firms. Once they have paid their rent for the month, they
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