Chapter 11

PERFECT COMPEtitiON
Boiling Down Chapter 11
The perfect competition model predicts many trends that occur in economic activity all around us. As in all models, it simplifies the world by making useful assumptions. The key assumptions are:

1. The market has many buyers and sellers so that no one unit is big enough to influence market price.
2. The market has a standardized product so one producer's good is a perfect substitute for another producer's product.
3. Information is free and instant about all market variables.
4. All factors can move instantly and at no cost.
5. Producers are economic profit maximizers.

Economic profit will usually be less than accounting profit because economic profit accounts for the full opportunity cost of all factors of produc­tion. Therefore, if economic profit is positive, resources will be attracted into the industry to take advantage of the returns that exceed the opportunity cost of the resources being used. Only when economic profit is bid down to zero will resources stop flowing into the industry. Thus, in the long run, firms that do not maximize profit will be losers when the economic profits of the maximizers in the industry are competed down to zero. Remember that accounting profit will still be positive and owners will get a fair market return for their effort and risk taking when economic profit falls to zero.
Because competitive firms produce only a tiny part of the market output, they do not have the power to set their own price. Rather, they take the existing market price and sell whatever they produce at the going price. Therefore their marginal revenue per unit sold is constant and equal to price. The relevant total revenue function will be a linear positively sloped line with a slope equal to the price. The cost functions of the firm will correspond to the cost relationships developed in Chapter 10. Viewed in terms of the total functions, the firm will maximize profit where the total revenue exceeds the total cost by the greatest amount. This will be where the slopes of the two functions are equal. Since these slopes represent the marginal values of the functions, we can say that profit is maximized where marginal revenue equals marginal costs.
Viewed in terms of the average and marginal functions, output should proceed until price equals marginal cost where marginal cost is rising. You should be able to relate this summary to the graphs presented in Figures 11-2 and 11-3 in your text.
Because, in the short run, firms must pay their fixed cost, whether they produce or not, the decision to produce depends only on whether the next unit will bring more revenue to the firm than its out-of-pocket costs of producing that unit. In other words, if the price (marginal revenue) does not cover the variable inputs, it would be better to close down and lose only the fixed cost rather than absorb debt to pay the variable inputs. Accordingly, if price falls below average variable cost, the firm should shut down. The MC curve above the AVC becomes the relevant locus of points that firms will move along as price changes, so that portion of the MC becomes the firm's supply curve. Study Figures 11-4 and 11-5 in the text if this still seems unclear.
The horizontal summation of all the individual firm supply curves becomes the market supply that interacts with the market demand to set the industry price. Firms take this price as their marginal revenue and set output where MR = MC. At this equilibrium situation, firms can measure economic profit by finding the profit per unit (the distance between price and ATC) and multiplying that times the number of units sold. The shaded rectangle in Figure 11-6 in the text illustrates this profit area. If price is below ATC, the firm would be incurring short-run economic losses.
One attraction of this type of market structure is that at equilibrium the price the consumer pays is exactly equal to the cost of the last unit produced. That means there is no more consumer or producer surplus to be gained and maximum welfare is reached, given the existing stock of capital. Consumer surplus measures the benefit consumers receive in excess of what they must pay, and producer surplus shows how much better off producers are by producing than by shutting down their operations and absorbing the fixed cost as a loss.
Another attractive feature of a perfect competitive industry is that economic profits act as a green light for more resources to enter the industry and economic losses are a signal for resources to exit the industry. In this long-run perspective, resource movement will shift supply until it equals demand at a price that will just cover the full opportunity cost of producing. Firms with the best technology and best size will be matched by competitors, or the competitors will find that price will fall below their costs. Finally, all firms will be producing with a firm size that has its minimum average cost at the bottom of LAC, a condition economists refer to as technological efficiency.
Any firm that gains an advantage will have to fight off others trying to buy that advantage. This process raises the opportunity cost of keeping the advantage and thereby equalizes all costs among producers. If the advantage is available free, then all firms will adopt it and a new, lower cost equilibrium results. At this point resources are in their best possible use until some change in demand or cost conditions sets the market in motion again. If additional market motion expands an industry, the new cost structure will depend on whether expanded production processes in the supply chain result in lower (pecuniary economies) or higher (pecuniary diseconomies) input prices. In the former case the long-run supply curve is downward sloping. The latter case leads to an upward-sloping long-run supply. If no change in supply chain cost results from industry expansion, then the long-run supply curve is horizontal.
The amazing part of this entire story is that all this resource movement occurs through voluntary actions of buyers and sellers, who respond to price and cost information. That information provides more data than could be collected by a group of people trying to plan the flow of resources. 
Many examples of market activity illustrate the dynamics described in this chapter. Most of them come from decentralized industries like agriculture and retailing; however, the dynamics of competitive interaction can be seen in a small way in almost any human interaction. The model, for all its lack of realism, is quite rich in uncovering outcomes that are not always intuitively obvious.

 

Chapter Outline

1. The goal of profit maximization must be understood in light of the con­cepts of economic, accounting, and normal profit.
2. Competition drives business people to profit maximize.
3. Profit maximizers have better access to credit.
4. Managers are sometimes rewarded by profit sharing and so have incentive to maximize profit.
5. Perfect competition requires a standardized product, mobile resources, perfect information, and price-taking firms.
6. Short-run profit maximization is achieved when the difference between total revenue and total cost is the greatest, which is also the point where marginal revenue equals marginal cost.
7. A firm should shut down if the market price it receives does not cover the average variable costs.
8. As price varies above the shut-down point, the firm will supply output as indicated by its marginal cost curve, so the marginal cost curve is the firm's supply curve.
9. The horizontal summation of the firm's supply curve is the industry supply curve.
10. In short-run equilibrium all firms are profit maximizing.
11. Economic profits or losses can exist in the short run.
12. Resources are efficiently allocated at equilibrium.
13. Producer and consumer surplus represents the welfare above cost that the markets generate, and this is maximized at equilibrium.
14. In the long run, firms can adjust plant size or shut down.
15. Optimal plant size for a firm exists where price equals long-run and short-run marginal cost.
16. Because of entry and exit possibilities, final long-run equilibrium ex­ists where price equals marginal cost at the minimum of the long-run cost curve.
17. When working effectively, the market acts as an invisible hand, coor­dinating enormously complicated information that channels resour­ces to their best use.
18. The long-run supply curve can take many shapes.
19. If resource prices are constant and LAC is U-shaped, the long-run supply curve will be horizontal.
20. If the LAC is horizontal, the long-run supply will be horizontal, but the number and size of the firms will be indeterminate.
21. The long-run supply curve will be negatively sloped if pecuniary economies are present and positively sloped if pecuniary dis­economies exist.
22. Supply price elasticity measures the sensitivity of the quantity sup­plied to price changes.
23. The problem of supporting the family farm, the illusory attraction of taxing business, and the adoption of cost-saving devices all provide ex­amples of the competitive market principle at work.

Important Terms

perfect competition	competitive equilibrium
standardized product	economic losses
price taker	allocative efficiency
profit maximization	producer surplus
economic profit	aggregate producer surplus
accounting profit	long-run equilibrium
normal profit	invisible hand
natural selection	pecuniary diseconomy
total revenue	pecuniary economy
marginal revenue	decreasing cost industries
MR = MC	constant cost industries
shut-down point	increasing cost industries
short-run supply	elasticity of supply

A Case to Consider

1. After viewing the film Back to the Future, Matt takes a nap but has a disturbing dream. He sees himself 50 years into the future, and his town has become a large city. Dozens of computer businesses exist in the city. However, he is still selling only 1200 computers a year at his store. He observes that computer prices are now $900 and his ATC is still $1000. His AVC is $750 and his AFC is $250. In a panic, Matt closes his store immediately rather than continue to lose money. Did he do the right thing? Why, or why not? Illustrate numerically why your answer is right.

 

 

 

1. In desperation, Matt considers raising his price back to the $1,300 that he charged in the “good old days.” Without any more information than the fact that computers now sell in a perfectly competitive market, can you tell Matt what the outcome of his price change will be?

 

 

1. Perplexed about whether his proposed action is the right approach and uncertain about your advice, Matt calls in a consultant who tells him that he is much smaller than other vendors who are making a profit at the going price. The consultant sketches out a U-shaped long-run average total cost curve and inserts two short-run cost curves on the graph. One is Matt's and the other is one like the successful competitors operate. The graph incorporates the information presented so far and, according to the consultant, is Matt's blueprint for success. Unfortunately, Matt has lost the graph and asks you to help him reproduce it. In the space provided on the next page, sketch out the long-run average cost, two short-run average cost curves and their marginal cost curves, the demand curve facing each firm in the industry, and Matt's average variable cost curve. Explain to Matt the point the consultant was trying to make by identifying the profit Matt will have if he expands.

 

 

Multiple-Choice Questions

1. A standardized product is necessary for the perfect competition model to work because
2. if the products are not perfect substitutes, then firms can develop customer loyalty to their unique type of product and will be able to charge a bit more than the market would otherwise allow.
3. many different sellers could not possibly create variations on one product, so that each one would be somewhat different.
4. there is no way that a farmer's corn or a taco vendor's tacos could be made unique to the producer.
5. a nonstandardized product leaves the consumer confused and immo­bilized in the marketplace.
6. Being a price taker in a market means that the seller
7. charges each consumer the maximum that she will be able to pay for the product.
8. has no choice but to charge the equilibrium price that results from the market supply and demand curves.
9. takes her price from her average total cost curve.
10. sells her products at different prices to different customers.
11. I get $100 revenue from the sale of my product each day. I rent the factory that I use for $25 a day. The raw materials of my operation cost $50 a day. I do all the work myself. Recently, a competitor offered me $30 a day to work for him. My accounting profit is $_____ and my economic profit is $_____ , so I _____take the job offer if money is my only concern.
12. -5, -5, will
13. 25, 30, will not
14. 25, -5, will
15. 50, 20, will not

 

1. If accounting profits are positive and economic profits are negative over the long haul, it is proper strategy to
2. monitor the situation closely and leave the business the minute ac­counting profits start to decline.
3. feel satisfied because, in the long run, accounting profits will average zero.
4. go back and recalculate your figures because accounting profits can never be more than economic profit.
5. close down the business and shift the resources to more profitable work.
6. Profit maximization is a reasonable assumption to build a theory around because
7. natural selection tends to weed out those who sacrifice profit for other goals.
8. profitable firms have easier access to capital markets than unprofitable firms.
9. managers, who otherwise have little incentive to maximize firm profit, become maximizers because of profit sharing and bonus incentives.
10. of all the above reasons.
11. Which statement is false about perfectly competitive firms?
12. The total revenue function is positively sloped and linear, with a slope equal to the product price.
13. The total cost function is linear, with a positive slope.
14. Marginal cost is rising and equal to average cost at long-run equilibrium output.
15. The firm will shut down if price is below average variable cost.
16. The statement that marginal cost = marginal revenue leads to profit maximization or loss minimization is true
17. all the time.
18. only in the long run.
19. only if marginal cost is rising at the point of equality.
20. only if average total cost is falling at the point of equality.
21. When economic profit exists for a firm, it is very tenuous because
22. costs will inevitably increase and eliminate profit.
23. price will fall because market supply will increase.
24. firms are driven to increase output to the point where average total cost will equal price.
25. firms are driven to reduce output until average total cost equals price.
26. When a profit-maximizing firm is at its short-run optimum point,
27. the average cost of the product is at its lowest possible point whether a profit is being made or not.
28. the firm will be shut down if its price is less than the average fixed cost.
29. the profit per unit of output will be at its maximum possible level.
30. all the above will be true.
31. none of the above will he true.
32. Short-run equilibrium is efficient because at that point
33. the price always will equal the average cost of production.
34. accounting profits will exist but economic profits will be 0.
35. all firms that are operating will be covering their fixed cost.
36. the benefit from the last unit produced is exactly equal to the cost of producing that unit of output.
37. all the above are true.

 

1. Producer surplus is
2. the amount of revenue received by the producer above the amount that would have been required for her to supply the product in the short run.
3. the amount of economic profit that would be present if there were no fixed costs in the production process.
4. the difference between the total revenue and the total variable cost of a production process.
5. all the above.
6. none of the above.
7. When an exchange occurs in a marketplace, the total net benefit that results from the transaction is
8. the consumer surplus minus the producer surplus.
9. the producer surplus minus the consumer surplus.
10. the sum of the producer surplus and the consumer surplus.
11. the entire area under the demand curve up to the quantity exchanged.
12. If a firm is producing where its SMC = price and the LMC is less than LAC, then it would do better in the long run by
13. increasing output with its existing plant until LMC equals price.
14. increasing plant size until LMC and SMC are identical and equal to price.
15. decreasing plant size until LAC, SAC, and price are equal.
16. doing nothing because it is already at the long-run profit maximizing point.
17. Which statement is true of perfectly competitive firms in the long run?
18. Firms can be of many different sizes if the long run supply curve is horizontal.
19. If economies of scale and diseconomies of scale exist, firms will all be the same size.
20. No firms will be making economic profits.
21. All the above are true.
22. In a competitive industry in the long run, it is likely that
23. firms with the advantage of location or an especially skilled work crew will be the lone survivors in equilibrium.
24. all firms that respond wisely to market signals will have the same LAC.
25. the firms with the poorest location will be the lone survivors in equi­librium because their location cost will be lowest.
26. only one large efficient firm can survive.
27. If an increase in market demand disturbs a long-run equilibrium situation that has a U-shaped LAC, and resources flowing into the industry stay constant in price, then
28. the long-run supply curve will be downward sloping.
29. the long-run supply curve will be upward sloping.
30. the long-run supply curve will be horizontal, and more plants will be built at the optimal size to accommodate expansion.
31. the long-run supply could be upward or downward sloping, with addi­tional information needed to determine the final outcome.
32. A supply curve is linear with a slope of 3. If, at a price of $21, there are 7 units demanded in the marketplace, then the elasticity of supply is
33. elastic.
34. inelastic.
35. unitary elasticity.
36. indeterminate with the information given.
37. Which statement is true of perfect competition?
38. Policy that attempts to redistribute income through market interven­tion will likely fail in the long run.
39. There is no incentive to innovate in this market structure because economic profits from innovation get bid away.
40. Since economic profits are zero in the long run, once the long run is reached no changes will occur in the industry.
41. All the above statements are true.
42. None of the above statements are true.
43. In a constant cost industry where the long-run supply curve is horizontal and the LAC curve is U-shaped, an increase in demand will, in the long run,
44. increase the size of each firm and decrease the number of firms in the industry.
45. increase the number of firms in the industry but not the size of existing firms.
46. lead to a lower price, larger firms, and more of them.
47. lead to any one of the above because the outcome is indeterminate.
48. The perfect competition model is characterized by all but which one of the following?
49. Intense rivalry among and between existing firms.
50. A downward sloping market demand curve.
51. Free information
52. A profit maximization goal for each firm.

21. Two perfectly competitive firms face the same cost and revenue functions. Which statement is true in this situation in the long run?
a.   The firm with the biggest markup earns the most profit.
b.   The firm with the lowest price sells the most.
c.   Both firms have identical profit in the long run.
d.   More data is needed before any of the above can be evaluated.
22.  If a competitive firm hopes to make continuous economic profit it will have to
a.   raise its price for brief periods at high demand times.
b.   lower its price at high demand times to attract market share.
c.   advertise aggressively
d.   continually innovate to stay ahead of the competition.
e.   do all of the above creatively as conditions permit.

Problems

1. In each of the following cases, indicate what is happening (up or down) to both accounting and economic profit.
2. You turn down a new higher-paying job offer.                                     accounting__________ economic__________
3. A government tax law change allows expensing rather than straight-line depreciating, a move that increases the firm's accounting costs in the short run. accounting__________ economic__________
4. The landlord dies and wills you the apartment that you are now living in and for which you are paying $500 per month.

                              accounting__________ economic__________

1. You develop a contagious disease that limits your social contact, but since your business is in your home using computer lines, your livelihood is not threatened. (Hint: You stop looking in the help-wanted ads for alternative work.) accounting__________ economic__________

 

1. There are 100 identical firms in a salad oil industry. The short-run MC of each firm is SMC = 10 + Q. The industry demand curve is P = 30 – .03Q. How much salad oil will be produced by this industry, and what will be the salad oil price? How much salad oil will each firm produce? Quantity is measured in barrels and price in dollars.

 

 

 

 

1. When the salad oil industry described above is at equilibrium, the elasticity of supply in the industry is _____________.

 

 

1. In question 2, if a blight destroys the corn crop from which salad oil is produced and none is produced during the time period under consideration, how much producer surplus is lost in the salad oil market? Sketch your answer below.

 

 

1. Sketch below a firm in short run equilibrium making some economic profit. Then assume that new management adopted a strategy where size of operation became the primary objective. Show on your graph how much output the firm could produce if it simply covered its full opportunity costs and no more.

 

1. A rural self-service station with automatic credit card paying methods has property worth $3,000. The only variable cost is for the gasoline, which has a marginal cost equal to MC = $.01Q, where Q = number of gallons sold. The price per gallon charged by the station is $2.50. The interest rate measure for the cost of capital is 10%. Last year the station sold 300 gallons of gasoline. The owner, an absentee entrepre­neur, is willing to operate with no economic profit, but he will not tolerate economic losses over the long run.
2. In the short run, is he a profit maximizer or loss minimizer? Show your work. How much profit/loss is the firm making?

 

1. Given the conditions listed above, what should the owner do in the short run? Show your work.

 

 

1. Next, a large expressway is built beside the station, and suddenly the demand for roadside property soars. The owner's property value triples to $9,000, but his marginal cost function stays the same. The price of gasoline now climbs to $3 per gallon. What is the new quantity that the station should sell in the short run, and how much profit (loss) will be generated?

 

1. If these conditions persist, what should the owner do in the long run?

 

 

1. Is he better off after the highway came in than he was before? Why?

 

1. Tex has a small plant that produces storm windows. Its total revenue function is         TR = 5.4Q, and the total cost function is TC = 30 + 3Q + .03Q2. What is the profit maximizing output for Tex? Show your work. MC = the first derivative of the total cost function or 3 + .06Q.

 

 

a. What is his selling price?

b. How much profit is he making?

 

c. Now assume that Tex has fixed costs of only 5. With this different information, answer the same three questions you just answered above. How have fixed-cost changes influenced Tex's production decisions?

 

 

1. If an increased demand for commercial airplanes puts upward pressure on the market price for titanium, then the LAC curve of Boeing airline manufacturer will be effected and the general properties of the long run supply function of airplanes will be known, assuming other input prices do not fall.  Sketch on the left graph below two LAC curves for the airplane manufacturers to illustrate the titanium price impact. Then on the right graph show the industry long run supply curve that results from these pecuniary diseconomies.

 

1. In the short run, firms rarely produce where their profit per unit is greatest. Why would they not want the most profit per unit? Sketch a graph to illustrate your answer.

 

10. One of the markets hit hardest in the recession on 2008-09 was the housing market. Evaluate the housing market as an example of perfect competition. Does it fit the criteria for a competitive market?

Answers to questions for Chapter 11
Case Questions

1. Matt was wrong, because P > AVC. Total revenue per year is $1,080,000 and total variable cost is $900,000. Therefore he has $180,000 to pay toward his fixed costs that he doesn't have if he closes down.
2. You know enough to tell him that he will sell none at $1,300 since his demand is horizontal. Everyone will buy at a competitor so it will be as if he is shut down except that he will have some variable costs associated with staying open.
3. The sketch labeled Case 11‑3 below shows the answer to this problem. The main point is that larger facilities would have lower costs per unit in Matt's case.

1. a, Perfect information and many buyers and sellers are also part of perfect competition.
2. b, If he priced higher he would lose all sales, and a lower price would be stupid because he can sell all he can produce at the market price.
3. c, The opportunity cost of the owner is an economic cost of being in business.
4. d, Accounting profits themselves do not tell you if you could be doing better.
5. d, It is possible for a person to not profit maximize if other goals are preferred.
6. b, Any time increasing and diminishing returns exist the cost curve cannot be linear.
7. c, If MC is falling you could be loss maximizing.
8. b, Supply will increase because profits attract competitors like flies.
9. e, Profit per unit is not important because if a smaller margin on more units brings more profits, the smaller margin is better.
10. d, This does not say that the firm has the right size plant in the short-run, however.
11. d, Be sure you can show producer surplus on a supply and demand graph.
12. c, Be able to show both of these on a supply and demand graph.
13. b, The firm is on the downward sloping part of the LATC curve and should expand.
14. d, In the long run no one has economic profit, and they will be the same size at the bottom of  the LATC unless the LATC curve is horizontal in which case any size firm can compete.
15. b, It is not only likely but mandatory.
16. c, Since the LATC does not change, firms do not expand but more join the market.
17. c, A supply curve coming out of the origin will have unitary elasticity.
18. a, If the labor market is competitive, people will get what they earn in the long run.
19. b, Similar to question 16 above.
20. a, Perfect competition is perfect because it leads to optimal efficiency, not because it promotes rivalry, or describes the real world accurately.
21. c, Both firms will need to price the same and in the long run make only normal profit which will be the same for both.
22. d, Firms are price takers so they do not have pricing power. Advertising with a homogeneous product would help competitors as much as a given firm. However, innovations that put one ahead of the competitors will for a short time enhance revenue, but it must be continuous because competitors will copy the innovations and eliminate the advantage. 

Problems

1. a) No change, down
2. b) Down, no change
3. c) Up, no change
4. d) No change, up.
5. The marginal cost curves of the firms must be horizontally summed into a market demand curve. At equilibrium the industry will produce 500 barrels and charge $15/barrel. Each firm produces 5 barrels.
6. Since price and quantity are given in answer 2 and since the supply slope is given in the supply equation the elasticity will be 15/500 times 1/.01. Thus the supply elasticity is 3.
7. The industry will lose $1,250 worth of producer surplus. The figure below labeled Problem 11‑3 shows graphically how this producer surplus can be measured. (5 x 500)/2 = 1250.

                                                                  
Sales max.

6.   a)The owner is not a profit maximizer.  MC = MR at 250 gallons.
6.   b) The owner should cut back production to 250 gallons in the short run and make $12.5 profit. (TR = $625 minus TC = $300 + $312.5 or $612.5)($625 - $612.5 = $12.5)
6.   c) The new profit‑maximizing quantity is now 300 gallons and the station is now making $450 in economic losses. This is because the opportunity cost of the land has now tripled to $900, which more than wipes out the previous $12.50 profit. (TR = $900) - (TC = $450 for gas + $900 for land.) Thus losses are $450.
6.   d) The owner should shut down in the long run, sell the property and bank the money for the 10% return of $900 profit. 

1. e) He is better off after the highway even though his economic losses went up. They went up because his land became so valuable. If he shuts down and sells the land, he will be much richer than he was as a gas distributor.

7.   a‑b) MR = MC at 40 output where selling price will be $5.40. Profit will be $18.

1. c) There is no change in price or output, but profits rise to $43 since fixed costs are $25 less.
2. Your sketch should have one LAC curve above the other, and a supply curve that is upward slop­ing to show the increasing cost of expansion.
3. Firms can make more profit by selling more units at less profit per unit than by selling a few units with a high profit margin. Your graph should be one of a firm profit maximizing with typical SR, ATC, and MC curves. You will notice that MC = MR beyond the point where ATC is minimized and the markup is greatest.
4. The housing market for individual family homes is not a good example of perfect competition for several reasons. First each house is a unique commodity and so houses are not standardized products. Sellers are not price takers because they set prices and hope for a sale. The quality of information varies from house to house so, all things considered, this market is not a good fit for this chapter. Where builders construct large tracks of similar condominiums or town houses the model is more applicable.

1. Three companies are pictured below on a long run ATC curve. The quantities produced for each firm are shown also. If the expected long run equilibrium is known to be coming in five years, describe the preferred strategy each firm should take in both the short run and long run.

    

1. Firm 1 should do what in the short run? Explain your reasoning.

 

  

1. What choices or strategies does firm 1 have in the long run?

 

1. Firm 2 should do what in the short run? Explain your reasoning.

 

 

1. What choices or strategies does firm 2 have in the long run?

 

1. Firm 3 should do what in the short run? Explain your reasoning.

 

1. What should firm 3 do in the long run?
2. Describe in words the process by which long-run equilibrium is arrived at in the scenario on the previous page.
3. What functions change in the process and why? Assume the LATC curve does not change.

1. Do more or less resources flow into this product area? Explain.

 

 

1. If the long-run ATC curve was to fall as shown below, would the industry tend to have more or less firms? Why?

 

1. Some argue that the case for innovation in competitive markets is a negative one because entrepreneurs innovate only to keep from making losses. (the truck airfoil case in your book.) What positive incentive is there for a strong R&D department in a competitive industry?

 

1. Except for the Yankees and a few other teams with huge local TV contracts, many sports teams that are very successful in their sport seem to make little more money that poorer teams. How can this be explained since they tend to draw more fans and sell more memorabilia? Does this mean the sports industry is perfectly competitive?

 

10. When you look at the demand curve for an individual firm there is no consumer surplus that can be measured because demand is equal to price. Yet, when you look at the market demand situation it is clear that consumer surplus exists. Explain how this can be true.