SAYRE | MORRIS Seventh Edition

An Evaluation of Competitive Markets

CHAPTER 9

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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)