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Chapter 4

Intermediate Economics Chapter Fourteen Notes

4 Pages
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Department
Economics
Course Code
ECON 2310
Professor
Johanna Goertz

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Chapter FourteenEquilibrium and Efficiency y What Makes a Market Competitive o Three factors cause a market to be perfectly competitive The first factor is the absence of transactions costs Transactions costs are absent when sellers can easily communicate their prices buyers can easily locate suppliers and learn their prices and buyers and sellers can arrange transactions without significant obstacles This means that when different sellers produce the same product buyers will have no difficulty identifying and purchasing from the seller who offers it at the best termso The second factor is product homogeneity Products are homogeneous when they are identical in the eyes of purchasers They are differentiated when some purchasers view the products as differento The third factor is the presence of a large number of sellers each of whom accounts for a small fraction of the market supply With many small sellers a single firm can substantially increase or decrease the amount it sells with its profit affected in only a trivial way by the negligible changes in price this may causeAs a result it will act like a price taker selling a unit if the price is greater than the marginal cost of producing ito Each firm can essentially take the market price as given and focus only on how much it wants to sell at that price which leads the firm to sell a unit precisely when the marginal cost of producing it is no greater than the market pricey Market Demand and Market Supply o Market DemandThe market demand for a product is the sum of the demands of all the individual consumers Graphically the market demand curve is the horizontal sum of the individuals demand curves To find the market demand in the short run we just add up consumers short run demand curves To find the market demand in the long run we add up consumers long run demand curveso Market SupplyThe market supply of a product is the sum of all the individual sellers supplies Graphically the market supply curve is therefore the horizontal sum of the individual supply curves Short Run Versus Long Run Market Supply y Over time the set of firms that operate in a market may change In the short run only those firms that are currently active in the market can produce output But in the long run other firms may be able to begin producing if it is profitable for them to do so This means that the short run market supply curve is found by summing the short run supply curves of the currently active firms while the long run market supply curve is found my summing the long run supply curves for all potential suppliersy Since technological knowledge diffuses over time and patents on production processes which can prevent others from copying a firms technology Eventually expires we can usually assume that technology is freely available over the long run
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