lecture 4 - 1 LECTURE 4 PERFECTLY COMPETITIVE MARKETS 2...

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Unformatted text preview: 1 LECTURE 4 PERFECTLY COMPETITIVE MARKETS 2 Perfect Competition Perfect Competition is defined by 4 conditions: Goods are identical; Each seller or buyer must be infinitesimally small compared to the market; Entry or exit is free (all resources are completely mobile); Information is perfect. 3 Perfect Competition Question 1: Will the market price change due to an improvement in technology of one individual firm? Question 2: How will be the demand curves facing an individual firm in perfectly competitive markets? 4 Perfect Competition Answers: No individual firm or consumer can change the market price by its or his/her own efforts. The demand curves facing an individual firm is horizontal! To ensure this, the 4 conditions specified above should be satisfied. Why? 5 Firms Decisions in Perfect Competition Economic Profit The goal of each firm is to maximize economic profit , which equals total revenue minus total cost . Total cost is the opportunity cost of production, which includes normal profit . In perfectly competitive markets, max ( ) ( ) ( ) ( ) R Q C Q MR Q MC Q- = ( ) ( ) ( ) constant P Q MR Q MC Q = = 6 Firms Decisions in Perfect Competition The perfectly competitive firm makes two decisions in the short run: Whether to produce or to shut down temporarily. If the decision is to produce, what quantity to produce. A firms long-run decisions are: Whether to increase or decrease its plant size. Whether to stay in the industry or leave it. 7 Competitive Markets in the Short Run The quantity decisions of a competitive firm in the short run: P MC = 8 Competitive Markets in the Short Run Question 1: At which price level, the firm will break even? When In this case, at p*. Why? p* min P ATC = 9 Competitive Markets in the Short Run Question 2: At which price level, the firm will shut down? When In this case, at Why? min P AVC = p 10 Competitive Markets in the Short Run A short-run supply curve for a competitive firm The supply curve of a competitive firm in the short run equal the marginal cost curve of the firm above the lowest point on the average variable cost curve. min s AVC S MC Q = 11 Competitive Markets in the Short Run The market supply curve is the horizontal aggregation of supply by all individual firms. 2 2 q 1 2 2 2 q q + 1 2 q 2 3 q 1 3 q 3 3 q 1 2 3 3 3 3 q q q + + 12 Competitive Markets in the Short Run A price-quantity combination constitutes a short-run equilibrium for a competitive market if it is such that No individual firm wishes to change the amount of the good it is supplying to the market; No individual consumer wishes to change the amount of the good he or she is demanding; The aggregate supply in the market equals the aggregate demand for the good. 13 Competitive Markets in the Short Run The short-run equilibrium for a competitive industry 14...
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lecture 4 - 1 LECTURE 4 PERFECTLY COMPETITIVE MARKETS 2...

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