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ECON 208 - Notes, week of Oct 20

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Economics (Arts)
ECON 208
Lee Ohanian

Adrienne Pacini ECON 208 WEEK October 20 2009 COMPETITIVE MARKETS Chapter 9Market Structure and Firm Behaviour Competitive Market StructureMarket structure all features of a market that affect the behaviour and performance of firms in that market o The number and size of sellers the extend of knowledge about one anothers actions the degree of freedom of entry and the degree of product differentiationMarket power the ability of a firm to influence the price of a product or the terms under which it is sold o The degree of competitiveness of the market is reflected in the influence that individual firms have on market prices o The less power an individual firm has to influence the market price the more competitive is that market structure o Perfectly competitive market structure when each firm has zero market powerCompetitive behaviour refers to the degree to which individual firms actively vie with one another for businessThe Theory of Perfect Competition The Assumptions of Perfect CompetitionA 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 industry 1 All firms sell a homogenous product o In the eyes of purchasers every unit of the product is identical to every other unit 2 Consumers have full knowledge of all firms product and price 3 Each firm reaches its minimum LRAC at a level of output that is small relative to the industrys total output 4 No barriers to entry or exito Firms are free to exit and enter the industry at willPrice taker a firm that can alter its rate of production and sales without affecting the market price of its product The Demand Curve for a Perfectly Competitive FirmThe demand curve for the entire industry is negativelyslopedHowever each individual firm faces a horizontal demand curve because variations in the firms output have no effect on priceThis does not mean that the firm could actually sell an infinite amount at the market price o Normal variations in the firms level of output have a negligible effect on total industry output Total Average and Marginal RevenueTotal revenue total receipts from the sale of a product TRPQAverage revenue the market price when all units are sold at the same price ARPQQPMarginal revenue the change in a firms total revenue resulting from a change in its sales by one unit MRTRQP
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