Mic08_Competitive Firms and Markets.pptxVIP

Chapter 8Competitive Firms and Markets Topics Perfect Competition. Profit Maximization. Competition in the Short Run. Competition in the Long Run. Price Taking A market is competitive if each firm in the market is a price taker. Price taker - a firm that cannot significantly affect the market price for its output or the prices at which it buys inputs. The price taker firm faces a demand curve that is horizontal at the market price. Why the Firm’s Demand Curve Is Horizontal Perfectly competitive markets have five characteristics that force firms to be price takers: Many small buyers and sellers All firms produce identical products Buyers and sellers have full information about price and product characteristics Negligible transaction costs Firms can easily enter and exit the market Deviations from Perfect Competition Many markets do not exhibit all characteristics of perfect competition but are still highly competitive. Competition – all markets in which no buyer or seller can significantly affect the market price—they are price takers—even if the market is not perfectly competitive. Derivation of a Competitive Firm’s Demand Curve Residual demand curve - the market demand that is not met by other sellers at any given price. Figure 8.1 Residual Demand Curve Derivation of a Competitive Firm’s Demand Curve (cont.) If the market has n identical firms, the elasticity of demand, εi, facing Firm i is where ε is the market elasticity of demand (a negative number); ηo is the elasticity of supply of each of the other firms (typically a positive number); n – 1 is the number of other firms. Solved Problem 8.1 The Canadian metal chair manufacturing market has n = 78 firms. The estimated elasticity of supply is η = 3.1, and the estimated elasticity of demand is ε = –1.1. Assuming that the firms are identical, calculate the elasticity of demand facing a single firm. Is its residual demand curve highly elastic? Solved Problem 8.1: Answer