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ECON Microeconomics 4 4th Edition McEachern Solutions Manual 1
ECON Microeconomics 4 4th Edition McEachern Solutions Manual 1
ECON Microeconomics 4 4th Edition McEachern Solutions Manual 1
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CHAPTER 8
PERFECT COMPETITION
INTRODUCTION
This chapter introduces the benchmark market structure—perfect competition—and then looks at profit
maximization for the perfectly competitive firm in the short run and in the long run. Perfectly competitive
firms have no control over the market price so only quantity produced can be varied. The level of output
that maximizes firm profits, or minimizes firm losses, in the short and long run are discussed next.
According to the golden rule of profit maximization, firms produce output to the point where marginal
cost equals marginal revenue. The last third of the chapter examines long-run industry supply and the
long-run adjustment process.
LEARNING OUTCOMES
8-1 Describe the market structure of perfect competition.
Market structures describe important features of the economic environment in which firms operate. A
firm’s decisions about how much to produce or what price to charge depend on the structure of the
market. Perfect competition is the most basic of market structures; if it exists, an individual buyer or
seller has no control over the price. Price is determined by market demand and supply.
8-2 Determine the perfectly competitive firm's profit-maximizing output in the short run.
All firms try to maximize economic profit, which is any profit above normal profit, by controlling
their rate of output. Subtracting total cost from total revenue is one way to find the profitmaximizing
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Chapter 8 Perfect Competition 114
output. Another way is to focus on marginal revenue and marginal cost. On a perfectly competitive
firm’s demand curve, market price, marginal revenue, and average revenue are all equal. The profit
maximizing rate of output is found where marginal revenue equals marginal cost.
8-3 Outline the conditions under which a firm should decide to produce in the short run rather than
shut down, even though it incurs an economic loss.
Firms that have not identified a profitable level of output can either operate at a loss or shut down. In
the short run, even a firm that shuts down keeps productive capacity intact by continuing to pay fixed
costs, which are sunk regardless. For a firm to produce in the short run, rather than shut down, the
market price must at least cover the firm’s average variable cost.
8-5 Explain why in perfect competition, there are no economic profits or losses in the long run.
In the long run, firms enter and leave the market, adjust the scale of operations, and experience no
distinction between fixed and variable cost. Short run economic profit attracts new entrants in the
long run and may cause existing firms to expand. Market supply thereby increases, driving down the
market price until economic profit disappears. When market demand decreases, firms incur short-run
losses and may go out of business in the long run. This results in lower market output and reduced
operational scale that increases each remaining firm’s long-run average cost until economic profit
disappears.
8-6 Explain why, in some perfectly competitive industries, market supply curves slope upward in the
long run.
The firms in some industries encounter higher average costs as industry output expands in the long
run. Expanding output bids up the prices of some resources or otherwise increases per-unit
production costs, and these higher costs shift up each firm’s cost curves.
8-7 Summarize how market equilibrium in perfect competition results in productive efficiency and
allocative efficiency.
Perfectly competitive markets exhibit both productive efficiency (because output is produced using
the most efficient combination of resources available) and allocative efficiency (because the goods
produced are those most valued by consumers). In equilibrium, a perfectly competitive market
allocates goods so that the marginal cost of the final unit produced equals the marginal value that
consumers attach to that final unit.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8 Perfect Competition 115
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8 Perfect Competition 116
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 8 Perfect Competition 117
CHAPTER SUMMARY
Market structures describe important features of the economic environment in which firms operate. These
features include the number of buyers and sellers in the market, the ease or difficulty of entering the
market, differences in the product across firms, and the forms of competition among firms.
A perfectly competitive market is characterized by (a) a large number of buyers and sellers, each too small
to influence market price; (b) firms in the market supply a commodity, which is a product undifferentiated
across producers; (c) buyers and sellers possess full information about the availability and prices of all
resources, goods, and technologies; and (d) firms and resources are freely mobile in the long run.
The market price in perfect competition is determined by the intersection of the market demand and
market supply curves. Each firm then faces a demand curve that is a horizontal line at the market price.
The firm’s demand curve also indicates the average revenue and marginal revenue received at each rate of
output. Firms in perfect competition are said to be price takers because no firm can influence the market
price. Each firm can vary only the amount it supplies at that price.
For a firm to produce in the short run, rather than shut down, the market price must at least cover the
firm’s average variable cost. If price is below average variable cost, the firm shuts down. That portion of
the marginal cost curve at or rising above the average variable cost curve becomes the perfectly
competitive firm’s short-run supply curve. The horizontal sum of each firm’s supply curve forms the
market supply curve. As long as price covers average variable cost, each perfectly competitive firm
maximizes profit or minimizes loss by producing where marginal revenue equals marginal cost.
Because firms are not free to enter or leave the market in the short run, economic profit or loss is possible.
In the long run, however, firms enter or leave the market and otherwise adjust their scale of operation until
any economic profit or loss is eliminated.
Competition drives each firm in the long run to produce at the lowest point on its long-run average cost
curve. At this rate of output, marginal revenue equals marginal cost and each also equals the price and
average cost. Firms that fail to produce at this least-cost combination do not survive in the long run.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Language: English
REVISED EDITION
UNIVERSITY OF WISCONSIN
MADISON
1907
CONTENTS
Page
INTRODUCTION 5
III. COMPOSITION 13
1. Theme Writing 13
2. Correction of Themes 17
3. Filing of Themes 19
4. Conferences on Written Work 20
5. Oral Composition 20
6. Principles of Composition 21
7. Use of Text-book 22
IV. READING 23
1. Methods of Teaching 23
2. Reading Aloud 27
3. Choice of Reading 28
4. Library Reading 29
XII. BIBLIOGRAPHY 65
1. The Teaching of English 65
2. Literature 66
3. Language and Grammar 68
4. Rhetoric and Composition 68
INTRODUCTION
1. Length of Course