Aluminio

CHAPTER TEN

PERFECT COMPETITION


OBJECTIVES

1. To examine supply and demand under perfect competition (pp. 323-328).

2. To make a connection between a perfectly competitive market structure and managerial decision making (pp. 328-332).

3. To examine equilibrium in the short run and long run and the dynamics of entry and exit (pp. 332-334).

4. To study the efficiency ofperfectly competitive markets. (pp. 334-345).

5. To examine issues in global competition and trade (pp. 345-350).


TEACHING SUGGESTIONS

I. Introduction and Motivation

The present chapter is an introduction to perfect competition. Subsequent chapters consider monopoly and oligopoly. Thus, this is only the beginning of the inquiry into market structure. Students should be told to be onthe lookout for how market structure might affect managerial decision making. The introduction of perfect competition will establish a benchmark against which other market structures can be compared.


II. Teaching the “Nuts and Bolts”

We begin by discussing with students their notions of competition. In particular, we discuss the consequences of raising price. In competitive markets thecomment that “a rise in price will result in customers buying from a competitor” can lead to a nice discussion about what this comment assumes about search costs and information, substitutability of products, number of competitors, etc.

It is reassuring to students to remind them that the principles of managerial decision making that they have already learned continue to be applicable givendifferent market structures. In fact, they may be well served by reviewing Chapter 2 (Optimal Decisions Using Marginal Analysis). The only difference, in terms of optimization, is the specification of the demand curve. In perfect competition it is horizontal. In a pure monopoly (Chapter 11), the single firm faces a downward-sloping industry demand curve.

It is worth spending some time onlong-run equilibrium because it gives the students a feeling for the dynamics of entry and exit and about how markets evolve. You may want to refer back to Chapter 7’s discussion of economic profits on pages 263-266 and to emphasize that zero economic profit includes a normal rate of return on invested capital.

Finally, the instructor should spend some time explaining and illustrating the efficiencyimplications of perfectly competitive markets. Again, one should caution students that not all markets are perfectly competitive. Nonetheless, studying perfectly competitive markets establishes a benchmark and helps to identify sources of market failure.

III. Discussion Assignment
The “southwest water shortage” reproduced on the next page makes for an interesting discussion vehicle. Theinstructor should distribute the page to students and can then pose the following questions:

- Is there a water shortage? What are the signs?
- What is the cause of the shortage?
- Is there currently a free market for buying and selling water?
- What are the potential advantages of such a market (if it were created)? What are the potential disadvantages?
Suggested answers: The absence of amarket for freely buying and selling water is at the heart of the seeming paradox of “waste amid shortage” in the Southwest. Presently opportunities to buy and sell water are limited and occur at wildly different prices. Farmers have historic rights to buy, but not sell, water at very low prices, while some users, such as chemical companies, cannot buy water at any price. Because many userspay a price well below the resource’s replacement cost, the signs of waste and inefficient use -- open-ditch irrigation, cultivation of water-intensive, low-value crops -- are hardly surprising. A first step toward a more rational program of water use would be for the government to end its subsidy programs and raise the prices it charges farmers for water. Higher prices would bring forth the...