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Chapter 23 Pure Competition
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II. A Purely Competitive Company making a Profit
A. Profit
Maximization for a Competitive Firm from Dennis Kaufman Wisconsin-Parkside. |
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III. Purely competitive adjustment
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A. Suppose industry demand and supply yield an equilibrium price
P at which a firm's economic profit is zero.
1. Step 1 indicates an increase in demand to D' causing economic profit. 2. Market entry is relatively easy and this profit draws in new firms increasing supply to S', Step 2, and economic profit disappears. 3. This automatic purely competitive adjustment causes equilibrium long run economic profit for pure competition to be zero. 4.To many, zero long run economic profit represents an ideal economic model as all the company earns is a normal return on investment. |
IV. Economic analysis of pure competition
A. Competition is
efficient.
1.
Price settles where long-run ATC is at its lowest point indicating goods are
produced efficiently.
2.
P = MR = MC indicating that resources are allocated efficiently as the
$'s spent by consumers (P) = the
$'s received by producers (MR) = the
$ cost of producers (MC) and
economic profit is zero.
B. Shortcomings
1.
Spillover costs (pollution) and benefits (education) aren't properly measured
resulting in goods being
over and
under produced.
a. Government intervention was needed to lower automobile pollution.
b. Governments supports education with grants and inexpensive loan problems
to students and colleges.
2.
Monopoly power develops to negate Adam Smith's "invisible hand" of
competition which is required
to assure that the purely
competitive adjustment occurs.
3.
Eliminating economic profit makes it difficult for competitive firms to afford
expensive R & D and technology.
C.
Economics Interactive has an in depth look at pure competition.
V. Competitive supply
1. A firm's MC curve is its
short-run supply curve.
2. Industry supply is the
horizontal summation of the firm's supply curves.
3.
Economics: Long
Run Supply - Cliffs Notes
analyzes the affect of long term supply on the efficiency of all industries.
Editors Note, see especially
VI. For a conservative view of competition
Read
Pure and Perfect" Competition? By What Standard? Part 5 in a
Series
of articles on Capitalism,
Free-competition, Antitrust, and Microsoft, By Richard M. Salsman
VII. Other theories of the competitive model from Wikipedia.
A.
Bertrand competition
B.
Cournot competition
requires calculus.
VIII.
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Economics Learning Center
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