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Principles of Microeconomics


Competitive Markets


his topic focuses on the behavior of firms in competitive markets. It is the first topic of three that fall under the classification of industrial organization, which focuses, at least in part, on how market structure affects firm’s pricing and output decisions. While there may not be many perfectly competitive markets, it is still useful to begin our analysis with the perfectly competitive model, as it provides a benchmark with which comparisons to other market structures can be made. The Pencasts for this topic include the following: a discussion of the necessary conditions for a market to be characterized by perfect competition, how an individual firm in a competitive market maximizes profit, how a competitive firm determines whether to operate or to shut down in the short run, how to construct the short-run market supply curve, what determines entry and exit in the long run, how to identify short- and long-run equilibria, and how to identify changes in short- and long-run equilibria when market conditions change.


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Perfect Competition

This Pencast describes the assumptions behind the perfectly-competitive model, and illustrates the "residual" demand curve facing a representative firm in the market. Furthermore, the shape of the "residual" demand curve is explained. [Play Pencast]


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Profit Maximization

This Pencast derives the representative firm’s profit function, and describes the two-step procedure used by firms to maximize their profit. The two-step procedure involves choosing the quantity of output that maximizes the firm’s profit and determining whether the firm is better of producing or shutting down in the short run. [Play Pencast]


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Graphical Profit Maximization

This Pencast illustrates how producing the quantity of output that corresponds to the intersection of the marginal revenue and marginal cost curves leads to the highest possible profit for a firm. [Play Pencast]


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Shutdown Decision

This Pencast illustrates the shutdown decision facing the representative firm. It illustrates when a firm would be better off shutting down, when a firm would be better off producing despite earning a short-run loss, and when a firm earns a short-run profit. [Play Pencast]


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Short-Run Market Supply

This Pencast illustrates how to derive the short-run market supply curve. In particular, it explains that the sum of the individual firm’s supply curves in the market determines the short-run market supply curve. [Play Pencast]


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Entry, Exit, and Long-Run Supply

This Pencast explain when firms enter and exit, and it also describes the conditions for a long-run equilibrium. Furthermore, it explains how the long-run supply curve flattens out such that it becomes perfectly elastic. [Play Pencast]


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Short-Run and Long-Run Equilibrium

This Pencast illustrates a situation in which the market is in a short-run and long-run equilibrium. It also states the long-run equilibrium condition; that is, that firms in the market earn zero economic profit. [Play Pencast]


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Change in Demand

This Pencast shows how an increase in demand results in changes in the short- and long-run equilibria. The applied problem begins by assuming the market is in a short- and long-run equilibrium. The demand shift alters the price in the market, which provides a profit opportunity to existing firms in the market. This profit encourages entry in the long run, which lowers the price until the market is at a new long-run equilibrium. [Play Pencast]


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Change in Supply

This Pencast shows how an increase in costs results in changes in the short- and long-run equilibria. The applied problem begins by assuming the market is in a short- and long-run equilibrium. The supply shift alters the price in the market, which causes existing firms in the market to incur a loss. This loss encourages exit in the long run, which raises the price until the market is at a new long-run equilibrium. [Play Pencast]


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