We have learned that when you buy a good from a firm in a competitive market, you can be assured that the price you pay is close to the cost of producing that good. In particular, if firms are competitive and profit maximizing, the price of a good equals the marginal cost of making that good. In addition, if firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production.

Although we have assumed throughout this chapter that firms are price takers, many of the tools developed here are also useful for studying firms in less competitive markets. We now turn to an examination of the behavior firms with market power. Marginal analysis will again be useful, but it will
have quite different implications .

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