This chapter is the first of three closely related chapters analyzing the four basic market models—pure competition, pure monopoly, monopolistic competition, and oligopoly. Here the market models are introduced and explained, which makes this the longest and perhaps most difficult of the three chapters.
Explanations and characteristics of the four models are outlined at the beginning of this chapter. Then the characteristics of a purely competitive industry are detailed. There is an introduction to the concept of the perfectly elastic demand curve facing an individual firm in a purely competitive industry. Next, the total, average, and marginal revenue schedules are presented in numeric and graphic form. Using the cost schedules from the previous chapter, the idea of profit maximization is explored.
The total-revenue—total-cost approach is analyzed first because of its simplicity. More space is devoted to explaining the MR = MC rule, and to demonstrating that this rule applies in all market structures, not just in pure competition.
Next, the firm’s short-run supply schedule is shown to be the same as its marginal-cost curve at all points above the average-variable-cost curve. Then the short-run competitive equilibrium is discussed at the firm and industry levels.
The long-run equilibrium position for a competitive industry is shown by reviewing the process of entry and exit in response to relative profit levels in the industry. Long-run supply curves and the conditions of constant, increasing, and decreasing costs are explored.
Finally, the chapter concludes with a detailed evaluation of pure competition in terms of productive and allocative efficiency (P = minimum ATC, and P = MC).
This was Chapter 21 in the 17th edition. The content is largely unchanged.
Learning objectives – In this chapter students will learn:
The names and main characteristics of the four basic market models.
The conditions required for purely competitive markets.
How purely competitive firm maximize profits or minimize losses.
Why the marginal cost curve and supply curve of competitive firms are identical.
How industry entry and exit produce economic efficiency.
The differences between constant-cost, increasing-cost, and decreasing-cost industries. II.
Four market models will be addressed in Chapters 9-11; characteristics of the models are summarized in Table 9.1. A.
Pure competition entails a large number of firms, standardized product, and easy entry (or exit) by new (or existing) firms. B.
At the opposite extreme, pure monopoly has one firm that is the sole seller of a product or service with no close substitutes; entry is blocked for other firms. C.
Monopolistic competition is close to pure competition, except that the product is differentiated among sellers rather than standardized, and there are fewer firms. D.
An oligopoly is an industry in which only a few firms exist, so each is affected by the price-output decisions of its rivals. III.
Pure Competition: Characteristics and Occurrence
The characteristics of pure competition:
Pure competition is rare in the real world, but the model is important. a.
The model helps analyze industries with characteristics similar to pure competition. b.
The model provides a context in which to apply revenue and cost concepts developed in previous chapters.
Pure competition provides a norm or standard against which to compare and evaluate the efficiency of the real world. 2.
Many sellers means that there are enough so that a single seller has no impact on price by its decisions alone. 3.
The products in a purely competitive market are homogeneous or standardized; each seller’s product is identical to its competitor’s. 4.
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