MICROECONOMICS
2010
Although pure competition is rare in the world, the operation of a purely competitive economy provides a standard to evaluate the real-world economy. With a very large number of firms that produce a standardized product if the price is the same, consumers will be indifferent about which product to buy.
No single firm can influence the market price in a competitive industry. The firms demand curve is perfectly elastic and price equals marginal revenue. The market demand graphs as a down sloping curve. With an entire industry, producing the same product, can affect price by changing industry output. A firm’s demand schedule is also its average-revenue schedule. Price and average are the same thing. Marginal Revenue is selling one more unit of output, the first unit sold increases total revenue from zero.
There are two ways to find the level of output which a competitive firm will realize maximum or minimum loss. First method, compare TR and TC. Second Method, compare MR and MC.
If Price exceeds minimum AVC, a firm maximizes profit or minimizes loss in the short run by producing the output, price or MR equals MC. If price is less than AVC they will shut down. If price is greater than AVC, but less than ATC its loss is producing Price equals Marginal cost.
A competitive firm shuts down production at least temporarily if price is less than minimum average variable cost because, in those situations, producing any amount of output will always result in variable costs exceeding revenues. Shutting down therefore results in a smaller loss because the firm will lose only its fixed cost, whereas, if it operated, it would lose its fixed cost plus whatever money is lost due to variable costs exceeding revenues.
For example, with an increased demand during the summer driving season could push prices higher, or hurricane season, flooding in the gulf. Higher gas prices mean that each of us will pay more at the gas pump, leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station.
A side effect of high gas prices is that discretionary spending goes down. Higher gas prices also mean that shoppers will drive less to conduct their purchases. Retailers are further squeezed as they are forced to pass on the expenses with their increased shipping costs.
The automobile industry has responded to rising gasoline prices and the need to reduce our dependence on oil by manufacturing smaller, more fuel-efficient, hybrid, and electric cars.
Some businesses, including colleges, may limit their employees' or students' financial burden on commuting by adjusting the hours they work a day and only working 4 days a week. Higher gas prices could affect a student’s ability to get to their college classes, which could possibly turn into a failed class. For college students who have already paid enormous amounts on tuition, books and supplies, and their rent. Rising gas prices may be the drawing point for college students when they must decide between fuel or food.
There are four markets that economists group together based off their market structures. Pure competition, which has a very large number of firms, making a standardized product, with no control over price, and entry into the market is very easy with no obstacles. The second is Monopolistic competition, has many firms, their product is differentiated. Which means products like clothing of furniture. This firm does not distinguish its product on price, rather on design and workmanship. Entry and Exiting are quite easy. Oligopoly involves only a few firms. This firm produces both Standardized or differentiated products. Affected by the rival’s decisions these firms must take those decisions into account to figure out their own price and output. Lastly, we have Pure monopoly, which has only one firm to produce their product or service, like electric utilities. All other firms are blocked, these firms are unique with no close substitutes. Besides pure competition, Pure Monopoly, Monopolistic Competition, and Oligopoly are called imperfect competition.