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Ten Principles of Economics - Part 29

Ten Principles of Economics - Part 29. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | J IN THIS CHAPTER YOU WILL . . . FIRMS IN Learn what characteristics make a market competitive Examine how competitive firms decide how much output to produce COMPETITIVE MARKETS If your local gas station raised the price it charges for gasoline by 20 percent it would see a large drop in the amount of gasoline it sold. Its customers would quickly switch to buying their gasoline at other gas stations. By contrast if your local water company raised the price of water by 20 percent it would see only a small decrease in the amount of water it sold. People might water their lawns less often and buy more water-efficient shower heads but they would be hard-pressed to reduce water consumption greatly and would be unlikely to find another supplier. The difference between the gasoline market and the water market is obvious There are many firms pumping gasoline but there is only one firm pumping water. As you might expect this difference in market structure shapes the pricing and production decisions of the firms that operate in these markets. In this chapter we examine the behavior of competitive firms such as your local gas station. You may recall that a market is competitive if each buyer and seller Examine how competitive firms decide when to shut down production temporarily Examine how competitive firms decide whether to exit or enter a market See how firm behavior determines a market s shortrun and long-run supply curves 291 292 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY is small compared to the size of the market and therefore has little ability to influence market prices. By contrast if a firm can influence the market price of the good it sells it is said to have market power. In the three chapters that follow this one we examine the behavior of firms with market power such as your local water company. Our analysis of competitive firms in this chapter will shed light on the decisions that lie behind the supply curve in a competitive market. Not .