Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 14 of 36 Firms In Competitive Markets
Section 2 of 24
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If a gas station raised its price for gasoline by 20 percent it would see a large drop in the amount of gasoline it sold.
Its customers would quickly switch to buying at other gas stations.
If a water utility company raised the price of water by 20 percent it would see only a small decrease in the amount of water it sells.
People would decrease somewhat the amount of water they use · but it’s unlikely they would to be able to find another supplier.
The difference between a local gasoline market and water market is many gas stations supply gasoline, but there is only one supplier of water.
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Here behavior of competitive firms such as gas stations will be discussed.
A market is competitive if each buyer and seller
· is small compared to the size of the market
· has little influence on market prices
If a firm can influence the market price of the good it sells it has market power and is not considered a competitive firm.
In this chapter about competitive firms we will find a market supply curve is closely linked to the competing firms' costs of production.
Also discussed are distinctions among a firm's types of costs, fixed, variable, average, and marginal, and how they influence supply decisions.
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