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COMPETITION ALONG A LINE: A basic analysis of location theory that demonstrates how and why competing firms tend to locate next to each other. This analysis indicates that as firms attempt to attract customers from each other, they edge increasingly closer. In particular, while an efficient situation (indicated by minimum transportation cost) is obtained by a more disperse location of firms, competition brings them together and creates inefficiency (by increasing transportation cost)

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Lesson 16: Perfect Competition | Unit 1: Price Taker Page: 3 of 28

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  • Each firm in a perfectly competitive market has no market control and is a price taker.

  • A price taker is a firm that takes, or accepts, the going market price and has no ability to control it or to charge a different price.
  • Because a perfectly competitive firm is such a small part of the overall market, it has no choice but to sell output at the going market price:

    • There is no WAY to sell output ABOVE the going market price.

    • There's no REASON to sell output BELOW the going market price.

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MARGINAL COST AND LAW OF DIMINISHING MARGINAL RETURNS

Decreasing then increasing marginal cost, reflected by a U-shaped marginal cost curve, is the result of increasing then decreasing marginal returns. In particular the decreasing marginal returns is caused by the law of diminishing marginal returns. As such, the law of diminishing marginal returns affects not only the short-run production of a firm but also the cost of short-run production. This translates into a positively-sloped supply curve for profit-maximizing competitive firms.

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BROWN PRAGMATOX
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Today, you are likely to spend a great deal of time browsing about a thrift store wanting to buy either a coffee cup commemorating last Friday (you know why) or a wall poster commemorating the first day of spring. Be on the lookout for mail order catalogs with hidden messages.
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Okun's Law posits that the unemployment rate increases by 1% for every 2% gap between real GDP and full-employment real GDP.
"And while the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department. "

-- Andrew Carnegie, entrepreneur

NAIRU
Non-Accelerating Inflation Rate of Unemployment
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