sayre | morris seventh edition an evaluation of competitive markets chapter 9 9-1© 2012 mcgraw-hill...
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SAYRE | MORRIS Seventh Edition
An Evaluation of Competitive Markets
CHAPTER 9
9-1© 2012 McGraw-Hill Ryerson Limited
Learning Objectives:
An Evaluation of Competitive Markets
LO1: Explain how perfectly competitive markets encourage technological improvement and growth in the size of firms
LO2: Explain the benefits of perfectly competitive marketsLO3: Understand the five reasons why perfect competition might
fail to achieve desirable results LO4: Understand how governments try to deal with external
costs, such as pollution LO5: Understand how governments try to deal with external
benefits, such as education
CHAPTER 9
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Laissez-faire • the economic doctrine that holds that an economy
works best with the minimum amount of government intervention
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LO1
Competitive Markets
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LO1
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LO1
In the long run, in perfectly competitive markets, equilibrium price will be equal to LR and SR average costs (at their minimums) and also to MC
Self-Test
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Exactly why should a firm downsize if it is suffering diseconomies of scale?
LO1
Self-Test
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Exactly why should a firm downsize if it is suffering diseconomies of scale?
LO1
If a firm is suffering diseconomies of scale, it is operating at a scale too large for this type of industry and is therefore experiencing high average costs (brought about by the high bureaucratic costs associated with big corporations). It could produce at lower average costs if it could reduce the size of its operations.
Productive Efficiency • production of an output at the lowest possible
average cost • productive efficiency is where P minimum AC
Allocative Efficiency • the allocation of resources to the goods and
services that society values most• Allocative efficiency occurs where P MC
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LO2
Benefits of Perfect Competition
Producer Surplus• the difference between the amount that producers
would be willing to accept for each unit of output and the price they receive when the output is sold
Economic Surplus• the summation of consumer surplus and producer
surplus
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LO2
Benefits of Perfect Competition
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LO2
In the long run, perfectly competitive markets achieve productive and allocative efficiency, and mazimize economic surplus
Four Strengths of a Competitive Market
1. maximizes economic surplus because both productive and allocative efficiency is achieved
2. does this automatically (is costless)
3. encourages innovation
4. promotes economic freedom
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LO2
Perfect Competition
Self-Test
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Given the following graph:At what output(s) is the firm productively efficient?At what output(s) is the firm allocatively efficient?
LO1
Self-Test
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Given the following graph:At what output(s) is the firm productively efficient?At what output(s) is the firm allocatively efficient?
LO1
Productively efficient output: Q1 (where P = lowest AC);Allocatively efficient output: Q2 (where P = MC)