ECON 1B03 Chapter Notes - Chapter 14: Marginal Revenue, Market Power, Perfect Competition
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25 Jun 2015
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The difference in market structure shapes the pricing and production decisions of the firms that operate in these markets. For a market to be competitive: each buyer and seller is small compared to the size of the market, little influence over market prices (no market power) Competitive market: follows the following two characteristics: 1. There are many buyers and many sellers in the market: 2. The goods offered by the various sellers are largely the same. No market power for a single firm-price takers. Firms can freely enter or exit the market in the long run (perfectly competitive) Price for q, not based on amount produced. Doubling q produced, doubles revenue, but price stays the same. Average revenue: total revenue divided by the amount of output: how much revenue a firm receives for a typical good, *for all firms: average revenue = the price of the good*
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1. Characteristics of competitive markets
The model of competitive markets relies on these three core assumptions:
1. | There must be many buyers and sellers a few players can't dominate the market. |
2. | Firms must produce an identical product buyer must regard all sellers' products as equivalent. |
3. | Firms and resources must be fully mobile, allowing for free entry into and exit from the industry. |
The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behaviour, assume for this problem that a market cannot maintain competition in the long run without free entry.
Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.
Is the scenario | Competitive? |
---|---|
Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks. | |
In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors. | |
Scholastik Inc. owns the U.S. copyright to a popular book series. It is the only company with the legal right to publish books in the series in the United States. | |
In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed. |