In this chapter, you will learn to solve these economic puzzles: In the long-run, can alligator farms earn an economic profit? Why would a firm stay in business while losing money? Why is the demand curve horizontal for a firm in a perfectly competitive market?,. | Chapter 8 Perfect Competition Key Concepts Summary Practice Quiz Internet Exercises ©2000 South-Western College Publishing * In this chapter, you will learn to solve these economic puzzles: Why is the demand curve horizontal for a firm in a perfectly competitive market? Why would a firm stay in business while losing money? In the long-run, can alligator farms earn an economic profit? * Who was Adam Smith? The father of modern economics who wrote The Wealth of Nations, published in 1776 * What did Adam Smith say about Competitive Forces? They are like an “invisible hand” that leads people who simply pursue their own interests to serve the interests of society * What is the purpose of this chapter? To explain how competitive markets determine prices, output, and profits * What is Market Structure? A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit * What is Perfect Competition? 1. many small firms 2. homogeneous product 3. very easy entry and exit 4. price taker * What does Homogeneous mean? Goods that cannot be distinguished from one another; for example, one potato cannot be distinguished from another potato * What is a Price Taker? A seller that has no control over the price of the product it sells * What determines price? Supply and demand * $80 $60 $40 $20 5 10 15 20 $100 $120 $130 $140 25 30 35 40 45 D S Market Supply and Demand P Q * What determines the individual firm’s Demand Curve? A horizontal line at the market price * $80 $60 $40 $20 5 10 15 20 $100 $120 $130 $140 25 30 35 40 45 D Individual firm demand * Why is this horizontal line the firm’s Demand Curve? If the firm charges more than this price, it will not sell anything, and it has no incentive to charge less than this price * Why does the firm have no incentive to charge less than the market price? It can sell everything it brings to . | Chapter 8 Perfect Competition Key Concepts Summary Practice Quiz Internet Exercises ©2000 South-Western College Publishing * In this chapter, you will learn to solve these economic puzzles: Why is the demand curve horizontal for a firm in a perfectly competitive market? Why would a firm stay in business while losing money? In the long-run, can alligator farms earn an economic profit? * Who was Adam Smith? The father of modern economics who wrote The Wealth of Nations, published in 1776 * What did Adam Smith say about Competitive Forces? They are like an “invisible hand” that leads people who simply pursue their own interests to serve the interests of society * What is the purpose of this chapter? To explain how competitive markets determine prices, output, and profits * What is Market Structure? A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit * What
