CHAPTER 32
Prices and Profits in Perfect Competition
LEARNING OBJECTIVES
List and explain the assumptions and characteristics of the four market structures.
Describe the demand curve facing the individual firm in a competitive market.
OUTLINE OF CHAPTER
I. Market Structures and the Degree of Competition
II. Demand and Price for a Purely Competitive Firm
KEY TERMS
monopolistic competition
a market structure with elements of perfect competition and monopoly
oligopoly
industry has a few giant sellers, each of which controls a significant share of the market
there is only one seller of a product that has no close substitutes
market power
an economic agent that must accept the price as determined in the market; both buyers and
sellers in perfect competition are price-takers
rule for maximizing profit under competition
produce at the quantity that equates marginal cost and price
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
List and explain the assumptions and characteristics of the four market structures.
1.
Large number of firms and buyers. Each seller supplies a small percentage of the
market. Each buyer demands a small percentage of the market. These assumptions are
2. What assumptions of a perfectly competitive market are violated in each of the other
market structures?
Monopolistic competition violates the assumption of homogeneous products.
3. Describe why it takes many firms in a market in order for an individual firm to be price
taker.
4. Use a supply and demand graph of a market to demonstrate and explain the price an
individ
Describe the demand curve facing the individual firm in a competitive market.
5.
deviate from that price?
6. Why is the assumption of homogenous products important for the horizontal demand
Explain the profit-maximizing level of output for the individual firm in a competitive
market.
7. Define and describe costs in the short run. Demonstrate their relationships graphically.
What happens to MC if labor costs increase?
8. Explain why firms would not produce where MC>MR or where MC<MR.
Firm will maximize profit by producing where MC=MR. If MC<MR, then the firm will
Understand criticism of the competitive market model and its assumptions.
9. Why are there so few industries that would be considered perfectly competitive?
Perfect competition requires many conditions to be true. Some industries may come
10. Why and why not are agricultural markets an example of perfectly competitive markets?
APPENDIX 32.1
Long Run Equilibrium for the Firm and the Industry in Perfect
Competition
LEARNING OBJECTIVES FOR APPENDIX 32.1
Understand the profit-maximizing level of output in the long run.
OUTLINE OF APPENDIX
I. Competitive Markets in the Long Run
ANSWERS TO APPENDIX 32.1 REVIEW QUESTIONS
Understand the profit-maximizing level of output in the long run.
1. Does earning a normal profit or when economic profit = 0 mean a firm is not earning a
profit? Explain.
2. Why can there be excess profits in the short run but not in the long run?
Long run equilibrium is defined as a situation in which no firm is earning excess profits.
Explain the dynamics of the competitive market that ensure normal profits for all firms in
the long run.
3. What assumption(s) of competitive markets is critical for competing away excess
profits? Explain.
4. Demonstrate graphically and explain what happens to excess profits in the long run.