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ECON 208 (113)
Chapter 9

Chapter 9.docx

3 Pages
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Department
Economics (Arts)
Course Code
ECON 208
Professor
Mayssun El- Attar Vilalta

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Chapter 9 Nov.6.12 Market Structure and Firm Behavior Significance of market structure 1. Understand behavior of an individual firm 2. Evaluate overall efficiency of market outcomes - Focus on competitive market structures - Firms maximize profits = TR – TC - Individual firm demand curve is not = to the industry demand curve - From the industry demand curve we can infer firm’s demand curve Competitive market structure - Competitiveness of the market = influence that individual firms have on market prices - The less power an individual firm has to influence the market price, the more competitive is that market’s structure - Zero market power: extreme form of competitive market, perfectively competitive market, firms are able to sell as much as they want at the market price - Each individual firm are price takers - Competitive behavior = degree to which individual firms actively vie with one another Assumptions of perfect competition: - All firms sell a homogenous product - Customers know the product and each firm’s price - Each firm reaches its minimum LRAC at a level of output that is small relative to the industry’s total output - Firms are price takers - Firms are free to exit and enter the industry Demand curve for a perfectly competitive firm - Each firm faces a horizontal demand curve - The industry demand curve is downward sloping Short-run decisions Should the firm produce at all?  if it produces: fixed costs + variable costs  if it doesn’t produce: fixed costs - The firm will not produce if TVC > TR of the output - If AVC > market price then the firm does not produce - At the “shut-down price” the firm can just cover its AVC so it is indifferent between producing and not producing How much should the firm produce? - If price > AVC the firm doesn’t shut down - When the firm decides to increase production in 1 unit, then for each extra unit the firm has to contemplate: 1. If MR > MC  produce more q 2. If MR = MC  no incentive to change q 3. If MR < MC  produce less q - The rule: choose output where price = MC (the market determines equilibrium price, the firm picks its output that maximizes its own profits)  Competitive industry’s supply curve = horizontal summation of the individual MC curves (above minimum AVC curves) Short-run equilibrium in a competitive market - When an industry is in short-run equilibrium: - market price is such that the market clears - each firm is maximizing its profits at this price - Profit per unit = price – ATC - How large are each firm’s profits in this short-run equilibrium?
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