Chapter 12: Firms in Perfectly Competitive Markets
1. It is worth emphasizing at the beginning of this chapter that the forthcoming discussion will focus both
2. Emphasize that firms in pure competition are more than just price takers. They are market condition
3. It is worthwhile to note to students how important market institutions are for understanding real world
market behavior. Organized exchanges, which are designed to standardize all aspects of trading except
4. It is crucial to communicate to students that the competitive model works well at the industry level
(supply and demand implications) because there are large numbers of people searching to make all the
mutually beneficial trades possible, where dollars represent generalized purchasing power (e.g.,
5. A good analogy to price taking in the competitive model is gambling in Las Vegas or at a horse racing
track. A gambler must take the odds and rules of a casino or track as given, then try to do the best he
downward sloping industry demand curve.
7. Emphasize that while perfectly competitive firms are price takers, there is no implication that prices are
9. Emphasize that the marginal revenue equals marginal cost profit maximization rule is just an extension
10. It is important to emphasize that firms are in fact profit seekers, not profit maximizers, in a world of
uncertainty. In a world of certainty (i.e., the standard models), these reduce to the same thing, but in the
11. Make sure students get the three step method now, as it will be used again for other market models.
12. A good test of student understanding is to ask students what difference it would make if the
13. Emphasize that the zero profit long run equilibrium solution is based on free entry (no barriers to
entry), not on the fact that they are price takers–one could be a price taker with barriers to entry resulting
in persistent profits (that would become capitalized into the
14. Note that it is not just entry into an industry which drives economic profits to zero, but that both entry
15. Unskilled labor in a large city is a good example of a probable constant cost industry, in contrast to
markets for various kinds of skilled labor.
16. Emphasize that firm cost curves end up in the same positions as before once long run equilibrium has