This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!
3.1. Perfect Competition
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Do curso por University of Illinois at Urbana-Champaign
Princípios de Microeconomia
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Competitive Output
Welcome to your sixth week! This module we continue our discussion of the firm by focusing on those firms working in a perfectly competitive (or competitive) environment.
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Dr. José J. Vázquez-CognetClinical Professor
Department of Economics
So let's start with a question, continue to use same example of store selling
barbeque sandwiches. But if you have a better example you can
kind of Insert that, in this question. Suppose you produce barbecue sandwiches,
or anything you produce. Now, a friend of yours tell you that
there's a demand for you, for your product, in this case sandwiches, in your
area it's inelastic, then you should increase your price, in order to increase
profits. And the question is should you follow your
friend's advice? And when you think about this question a
little bit more, you, you have to, you're forced to conclude that in order for your,
to follow your friends advice, you need more information.
Because there's two reasons why you may not be able to follow your friend's
advice, or even if you follow your friend's advice, you may actually end up
with the opposite result. The first one has to do with how large or
how many, how many people are competing in the same area that you're selling.
So let's say Mike is selling barbeque sandwiches.
Let's say that there's you know 10 more places selling barbeque sandwiches in
downtown, the same type of sandwich. Then even though the, the demand for
barbeque sandwiches could be inelastic in the area where Mike Works, Mike's own
demand, for his sandwiches, is not completely inelastic.
Because if Mike changes the price of his sandwiches, by lets say $0.50, if everyone
else, all the other barbeque sandwich places, are selling exactly the same
thing, then why would anyone buy from Mike, if they can buy from someone else?
For a lower price. So you see that when, when you are, when
you work in an area that you face fierce competition, we have a lot of people, then
you have very little control over the price.
And in essence the price elasticity of that product is really completely elastic.
You, you can't, if you're equally surprised, you lose all your customers.
So therefore in this particular section what I want you to think about is the
market structure. And in particular you have to ask yourself
two questions. Is the market structure you work in, the
industry which you're selling your good how many sellers you have?
Because if you have a lot of sellers, you will have very little control over the
price. The second question is, what are they
selling? If those people are all selling the same
thing, then we say that all choi-, all, all of those firms are what we call price
takers instead of price makers. And we call that situation, perfect
competition. And again, the rationale should be
straightforward, if you sell something like corn.
That is not you know, corn selling by farmer a is not that special than corn
selling by farmer b. And you're competing against many other
farmers so it's a very large market. Everyone is selling exactly the same
thing. So in that particular market each farmer
has very little control over the price because if they increase the price there
is no reason for anyone to buy corn from them.
And if they decrease the price then everyone would respond technically by
doing the same thing and you're not really gaining any new customers.
So if you're a farmer in a typical, in a very competitive market, then you really
have very little control over the price. You have to take the price from the market
and deal with that price and do the best you can with it.
So in that situation we say that firm's in a perfect competitive environment are
price, price takers. Now that's a very difficult, different
situation in which you actually have some degree of control over the price.
And for that you need to somehow sell something in which you have less degree of
competition. If Mike sells something that somehow think
is special than he might be able to change the price, because he faces less
competition. Because the, the market for that thing
that he sells is a lot smaller. Than if he actually has a lot more
competition. So in this week, we going to talk about
the issue of firms working on a perfectly competitive environment.
And next week we going to talk about situations in which firms have a little
more degree of control over the price. But in order for us to generalize a lot of
things that we're going to learn about the firm, we have to simplify things a little
bit and assume that the firms we're going to be talking about this week our firm's
working in a perfectly competitive environment.
And what that means is that they have no control over the price.
They have to take the price from the market and do the best they can with that
price, particularly by perhaps changing costs or changing the output.
Kay? Now that's not a completely unrealistic
assumption. Because, for some markets, like we said.
That assumption of perfect completion make complete sense.
Agricultural products, stock markets, and stocks in the stock market.
You also have for, a, a lot of sellers selling that.
So people have very little control over the price.
So, in some markets, you have a as, you know the perfect competition as such it
makes perfect sense. Some other markets like the retail
markets, clothing, food, those markets have a little more control over the price.
So those things are, resemble more of the models we're going to talk about next
week. Even though the, the things that we're
going to generalize this week apply for most firms.
Irregardless if they are perfect or competitive or not.
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Urbana-Champaign. [music]
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