Perfect Competion
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Transcript of Perfect Competion
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Perfect competition
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Perfectly competitive market
many buyers and sellers,
identical (also known as homogeneous)products,
no barriers to either entry or exit, and
buyers and sellers have perfectinformation.
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Demand curve facing a single firm no individual firm can affect the market price
demand curve facing each firm is perfectly elastic
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Profit maximization produce where MR = MC
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P = MR
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Profit-maximizing level of output
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Economic Profits > 0
Economic profit
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Loss minimization and the
shut-down rule Suppose thatP < ATC. Since the firm is
experiencing a loss, should it shut down?
Loss if shut down = fixed costs Shut down in the short run only if the loss
that occurs where MR = MC exceeds the lossthat would occur if the firm shuts down (=
fixed cost) Stay in business if TR > VC. This implies thatP > AVC. Shut down ifP < AVC.
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Economic loss (AVC
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Loss if shut down
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Break-even price If price = minimum
point on ATC
curve, economicprofit = 0.
Owners receivenormal profit.
No incentive forfirms to eitherenter or leave themarket.
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P < AVC
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Short-run supply curve A perfectly
competitive
firm willproduce atthe level ofoutput atwhich P =MC, as longas P > AVC.
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Long run Firms enter if economic profits > 0
market supply increases
price declines
profit declines until economic profit equals zero(and entry stops)
Firms exit if economic losses occur
market supply decreases
price rises
losses decline until economic profit equals zero
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Long-run equilibrium
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LATC
D
Qe
Q
o
SAC1
SAC2
SAC3
SAC4
A competitive firmslong-run equilibrium
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Long-run equilibrium and
economic efficiency P = MR= MC = SATC = LATC
Allocative efficiency: MC = P
Productive efficiency: MC= SATC = LATC Zero economic profit (normal profit) : P = ATC
Two desirable efficiency properties (assuming no
market failure) P = MC (Social marginal benefit = social marginal
cost)
P = minimum ATC
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Consumer and producer
surplus
Gains from
trade =consumersurplus +producer
surplus
Consumer surplus
Producer surplus
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Real Life Example: Agriculture Farmers accept market Price
Cant sell more expensive: no one will buy
Wont sell cheaper: lose $$$
Crop similar (corn is corn)
Costs low to buy/rent farmland compared to
starting a corporation. Farming methods can belearned
Info. easy to find
1 farmer has no control of price
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Other Examples a large auction of identical goods with all potential buyers and sellers
present. eg Free software works along lines that approximate perfectcompetition. Anyone is free to enter and leave the market at no cost.
All code is freely accessible and modifiable, and individuals are free tobehave independently. Free software may be bought or sold atwhatever price that the market may allow.
street food in developing countries. This is so since relatively fewbarriers to entry/exit exist for street vendors. Furthermore, there areoften numerous buyers and sellers of a given street food, in addition to
consumers/sellers possessing perfect information of the product inquestion. It is often the case that street vendors may serve ahomogenous product, in which little to no variations in the product'snature exist.