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