This chapter is the first of three closely related chapters analyzing the four basic market models—pure competition, pure monopoly, monopolistic competition, and oligopoly. Here the market models are introduced and explained, which makes this the longest and perhaps most difficult of the three chapters.
Explanations and characteristics of the four models are outlined at the beginning of this chapter. Then the characteristics of a purely competitive industry are detailed. There is an introduction to the concept of the perfectly elastic demand curve facing an individual firm in a purely competitive industry. Next, the total, average, and marginal revenue schedules are presented…show more content… 5. Freedom of entry and exit means that there are no significant obstacles preventing firms from entering or leaving the industry. B. There are four major objectives to analyzing pure competition. 1. To examine demand from the seller’s viewpoint, 2. To see how a competitive producer responds to market price in the short run, 3. To explore the nature of long-run adjustments in a competitive industry, and 4. To evaluate the efficiency of competitive industries.
IV. Demand from the Viewpoint of a Competitive Seller A. The individual firm will view its demand as perfectly elastic. 1. Figures 9.1 and 9.7a illustrate this. 2. The demand curve is not perfectly elastic for the industry: It only appears that way to the individual firm, since they must take the market price no matter what quantity they produce. 3. Note from Figure 9.1 that a perfectly elastic demand curve is a horizontal line at the price. B. Definitions of average, total, and marginal revenue: Know the formulas for each. 1. Average revenue is the price per unit for each firm in pure competition. 2. Total revenue is the price multiplied by the quantity sold. 3. Marginal revenue is the change in total revenue and will also equal the unit price in conditions of pure competition. (Key Question 3)
V. Profit Maximization in the Short-Run: Two Approaches A. In the short run the firm has a