Reading

Date: 2015-10-07; view: 347.

PERFECT COMPETITION

UNIT 5

Discussion

Work in pairs.

Discuss in pairs what you have learned about short-run and long-run costs.

1.Skim through text 32 and think of the suitable title. TEXT 32

This unit addresses an important question facing all managers: What can I do to achieve the highest possible profits for my firm? Although the answer sometimes differs, depending on the type of market in which the firm sells its products, the fundamental principles are quite similar for all firms. The decision maker chooses the level of an activity or activities so as to maximize the net benefits - total benefits minus total costs. To maximize net benefits, marginal benefits must equal marginal cost for the last unit of the activity. In the case of firms, the net benefits are called profits. Profits is the difference between total revenue and total cost. Thus profit is maximized where marginal revenue equals marginal cost for the last unit of the activity undertaken. A manager can choose either the level of output or the level of employment of inputs to maximize profits. Choosing either the output level or the level of input usage will lead to the same maximum profit outcome.

The theory of perfect competition is important for two reasons. First, the theory describes important segments of an economy, the most important of which are the markets for most agricultural products. Typically, in agricultural markets, there are a large number of firms that are small relative to the entire market - each firm produces only a small fraction of the total industry output. Each agricultural producer recognizes that the price of the product is determined by the market forces of demand and supply, and thus cannot be set by an individual producer. In addition to agricultural products, many other products are also sold in markets that are perfectly competitive, or nearly perfectly competitive.

A second reason the theory of perfect competition is important is that the conclusions derived from it frequently permit accurate explanation and prediction of real world phenomena. The theory often works well as a model of economic processes even though it does not precisely describe the firms and industries under consideration. Therefore, the fundamentals of the theory are useful not only to economists but to managerial decision makers as well. Managers can profitably use the conclusions of the theory, even though all of its assumptions do not exactly fit the characteristics of their firms.

To summarize, although relatively few markets are perfectly competitive, the behavior of many markets closely approximates the model of perfect competition. Thus, we can use the model as an approximation of real-world markets that are close to being perfectly competitive.

2. Comprehension check.

Working in pairs, take turns answering the questions:

1. What is perfectly competitive market?

2. What decisions should a manager make for profit maximizing?

3. Why is the theory of perfect competition important for economists and managers?

3. There are four paragraphs in the text. Make a list of key words from each paragraph.