Chapter 8--Perfect Competition

Chapter 8--Perfect Competition - Chapter 8-Perfect...

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Chapter 8—Perfect Competition I. The Theory of Perfect Competition A. The theory of perfect competition is built on four assumptions: 1. There are many sellers and many buyers, none of which is large in relation to total sales or purchases. 2. Each firm produces and sells a homogeneous (non-unique) product. 3. Buyers and sellers have all relevant information with respect to prices, product quality, sources of supply, and so on. 4. There is easy entry into and exit from the industry. B. The theory of perfect competition predicts the following: 1. Economic profits will be squeezed out of the industry in the long run by the entry of new firms; that is, zero economic profit exists in the long run. 2. In equilibrium, forms product the quantity of output at which price equals marginal cost (P = MC). 3. In the short run, firms will stay in business as long as price covers average variable costs (P > AVC). 4. In the long run, firms will stay in business as long as price covers average total costs (P > ATC). 5. In the short run, an increase in demand will lead to a rise in price; whether the price in
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This note was uploaded on 04/16/2008 for the course ECO 1311 taught by Professor Wheaton during the Fall '07 term at SMU.

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Chapter 8--Perfect Competition - Chapter 8-Perfect...

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