1. SAYRE | MORRIS Seventh Edition An Evaluation of Competitive Markets CHAPTER 9 9-1© 2012 McGraw-Hill Ryerson Limited

2. Learning Objectives: An Evaluation of Competitive Markets LO1: Explain how perfectly competitive markets encourage technological improvement and growth in the size of firms LO2: Explain the benefits of perfectly competitive markets LO3: Understand the five reasons why perfect competition might fail to achieve desirable results LO4: Understand how governments try to deal with external costs, such as pollution LO5: Understand how governments try to deal with external benefits, such as education CHAPTER 9 9-2© 2012 McGraw-Hill Ryerson Limited

3. Laissez-faire the economic doctrine that holds that an economy works best with the minimum amount of government intervention 9-3© 2012 McGraw-Hill Ryerson Limited LO1 Competitive Markets

4. 9-4© 2012 McGraw-Hill Ryerson Limited LO1

5. 9-5© 2012 McGraw-Hill Ryerson Limited LO1 In the long run, in perfectly competitive markets, equilibrium price will be equal to LR and SR average costs (at their minimums) and also to MC

6. Self-Test 9-6© 2012 McGraw-Hill Ryerson Limited Exactly why should a firm downsize if it is suffering diseconomies of scale? LO1

7. Self-Test 9-7© 2012 McGraw-Hill Ryerson Limited Exactly why should a firm downsize if it is suffering diseconomies of scale? LO1 If a firm is suffering diseconomies of scale, it is operating at a scale too large for this type of industry and is therefore experiencing high average costs (brought about by the high bureaucratic costs associated with big corporations). It could produce at lower average costs if it could reduce the size of its operations.

8. Productive Efficiency production of an output at the lowest possible average cost productive efficiency is where P  minimum AC Allocative Efficiency the allocation of resources to the goods and services that society values most Allocative efficiency occurs where P  MC 9-8© 2012 McGraw-Hill Ryerson Limited LO2 Benefits of Perfect Competition

9. Producer Surplus the difference between the amount that producers would be willing to accept for each unit of output and the price they receive when the output is sold Economic Surplus the summation of consumer surplus and producer surplus 9-9© 2012 McGraw-Hill Ryerson Limited LO2 Benefits of Perfect Competition

10. 9-10© 2012 McGraw-Hill Ryerson Limited LO2 In the long run, perfectly competitive markets achieve productive and allocative efficiency, and mazimize economic surplus

11. Four Strengths of a Competitive Market 1.maximizes economic surplus because both productive and allocative efficiency is achieved 2.does this automatically (is costless) 3.encourages innovation 4.promotes economic freedom 9-11© 2012 McGraw-Hill Ryerson Limited LO2 Perfect Competition

12. Self-Test 9-12© 2012 McGraw-Hill Ryerson Limited Given the following graph: At what output(s) is the firm productively efficient? At what output(s) is the firm allocatively efficient? LO1

13. Self-Test 9-13© 2012 McGraw-Hill Ryerson Limited Given the following graph: At what output(s) is the firm productively efficient? At what output(s) is the firm allocatively efficient? LO1 Productively efficient output: Q 1 (where P = lowest AC); Allocatively efficient output: Q 2 (where P = MC)