Lecture15 - 1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D....

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D. LECTURE 15 Perfect competition: Recap Sellers are price-takers Large number of buyers Large number of sellers, each with negligible market share Standardized products No Barriers to entry/exit LECTURE 15 Large number of buyers and sellers Goods offered are functionally identical Demand curves facing individual firms are perfectly elastic Freedom of entry and exit Profits act as a signal regarding whether to enter or exit an industry As a firm produces more, the price per unit of output sold does not fall LECTURE 15 A Price-Taking Firm cannot influence the prices of its output or inputs It is too small in relation to the total market A change in its own supply or demand has a negligible effect on total market supply or demand - hence no change in market price LECTURE 15 A price-taking firms demand curve is horizontal (perfectly elastic) at the given market price (P) MR is constant and equal to the given price (MR = P) LECTURE 15 The firm faces a flat demand curve at the market price Note: MR is the slope of the TR (or first derivative of the TR). Here, P is the slope of TR as well, since MR = P 2 LECTURE 15 Since the firms demand function is elastic, they can sell all they want at the market price With perfect competition a perfectly elastic demand function for the firm results in P = AR = MR To maximize profits, produce to the level of output where P = MR = MC LECTURE 15 Short Run Production Decision: Fixed Costs are irrelevant to the firms optimal SR production Firm will cease production in the SR if P < Min AVC (Shut down price) When P> Min AVC; produce at a level such that P = MC SR individual supply curve corresponds to the MC curve at P > Min AVC LECTURE 15 Marginal Rule: The profit maximizing output level occurs where MR= MC LECTURE 15 Long Run Production Decision: Fixed Costs matter in the LR Number of producers (fixed in the SR) changes in the LR as firms enter/exit the industry Firms will exist the industry if P < Min AVC Firms will remain/enter the industry if P > Min...
View Full Document

This note was uploaded on 04/16/2008 for the course ECON 1 taught by Professor Nagata during the Winter '08 term at UCLA.

Page1 / 6

Lecture15 - 1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D....

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online