firm

Examples of firm in the following topics:

• Duopoly Example

  • Firms have market power, and each firm's output decision affects the good's price;
  • Firm B will be conducting similar calculations with respect to Firm A at the same time.
  • If Firm B is setting the price above marginal cost but below monopoly price, then Firm A will set the price just below that of Firm B.
  • When Firm 2 prices above MC but below monopoly prices, Firm 1 prices just below Firm 2.
  • When Firm 2 prices above monopoly price (PM), Firm 1 prices at monopoly level (P1=PM).

• Introducing the Firm

  • "Firm" is simply another word for company or business.
  • Not all markets and societies involve firms.
  • Firms also allow economic growth, not only for the firm but for the broader society in which it resides.
  • Organization into a firm can considerably reduce these costs.
  • Explain the importance of private companies and firms in the economy

• Collusion and Competition

  • Oligopoly is a market structure in which there are a few firms producing a product.
  • Second, coordination among firms is difficult, and becomes more so the greater the number of firms involved.
  • A firm may agree to collude and then break the agreement, undercutting the profits of the firms still holding to the agreement.
  • Finally, a firm may be discouraged from collusion if it does not perceive itself to be able to effectively punish firms that may break the agreement.
  • Price leadership, which is also sometimes called parallel pricing, occurs when the dominant competitor publishes its price ahead of other firms in the market, and the other firms then match the announced price.

• Shut Down Case

  • By stopping production the firm only loses the fixed costs .
  • The goal of a firm is to maximize profits and minimize losses.
  • If the revenue the firm is making is greater than the variable cost (R>VC) then the firm is covering it's variable costs and there is additional revenue to partially or entirely cover the fixed costs.
  • It does not automatically mean that a firm is going out of business.
  • A firm cannot incur losses indefinitely which impacts long run decisions.

• The Firm in Pure Competition

  • A purely competitive market is characterized by a large number of relatively small firms.
  • No single firm can influence the market price and are considered price takers.
  • Panel B.VII.2 represents a single firm in the market.
  • Since there are a a large number of firms in the market with identical or homogeneous products, buyers have no preference for any one firm's product.
  • The demand faced by a single firm is perfectly elastic at the market price.

• The Demand Curve in Perfect Competition

  • A perfectly competitive firm faces a demand curve is a horizontal line equal to the equilibrium price of the entire market.
  • Individual firms are forced to charge the equilibrium price of the market or consumers will purchase the product from the numerous other firms in the market charging a lower price (keep in mind the key conditions of perfect competition).
  • The demand curve for an individual firm is thus equal to the equilibrium price of the market .
  • Instead, assuming that the firm is a profit-maximizer, it will sell its goods at the market price.
  • The demand curve for an individual firm is equal to the equilibrium price of the market.

• Short Run Firm Production Decision

  • Fixed costs have no impact on a firm's short run decisions.
  • In the short run, a firm that is maximizing its profits will:
  • The goal of a firm is to maximize profits by minimizing losses.
  • However, a firm cannot incur losses indefinitely.
  • If market conditions do not improve a firm can exit the market.

• Market Power

  • Market power is a measure of the economic strength of a firm.
  • A firm is said to have significant market power when price exceeds marginal cost and long run average cost, so the firm makes economic profits.
  • Such firms are often referred to as "price makers. " In contrast, firms with limited to no market power are referred to as "price takers. "
  • The numbers and size of firms determine the extent that firms can withstand pressures and threats to change prices or product flows.
  • A firm's market power influences its behavior.

• Demand Curve

  • The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic.
  • This is due to the fact that firms have market power: they can raise prices without losing all of their customers.
  • In this type of market, these firms have a limited ability to dictate the price of its products; a firm is a price setter not a price taker (at least to some degree).
  • Because the individual firm's demand curve is downward sloping, reflecting market power, the price these firms will charge will exceed their marginal costs.
  • Explain how the shape of the demand curve affects the firms that exist in a market with monopolistic competition

• Introduction to Firms with "Market Power"

  • The existence of market power is tied to the demand conditions the firm faces.
  • In pure competition, the firms' outputs are homogeneous.
  • The crucial factor is the demand for the firm's output must be negatively sloped: the firm becomes a "price maker."
  • If there are significant BTE, a firm or firms may be able to sustain above normal profits over time because other firms are prevented from entry to capture the above normal profits.
  • Firms in monopolistic competition or imperfectly competitive markets are more likely to have limited market power because there are many firms with differentiated products (there are substitutes) and there is relative ease of entry and exit into the market.