lectureOutline08

# lectureOutline08 - Introduction to Economics Source: LR12,...

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ECO 100Y Introduction to Economics Topic 8: Perfect Competition Source: LR12, LR 11, LR10, Chapter 9 LR 12, Ch 12 to pg 281; LR 11, Ch 12, to pg 294; LR10, Ch 12, to pg 286 (we discuss monopoly in the next assignment). 1 Topic 8: Perfect Competition ECO 100 W.G. Wolfson Perfect Competition - Assumptions Two key assumptions: Firm is a price-taker Free entry of new firms (free = no obstacles) Other important assumptions: Homogeneous commodity Perfect information Many firms; many buyers; no strategic behaviour 2 Topic 8: Perfect Competition ECO 100 W.G. Wolfson 1 2

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The Firm’s Demand Curve Firms are price-takers in a perfectly competitive market They can sell any amount at a fixed price The output of any firm is too small relative to the industry’s output to affect the market price Firms receive the same fixed price for every unit of output They face a horizontal demand curve (d) at the level of the market price They face a perfectly elastic demand curve (d); E d = ECO 100 W.G. Wolfson 3 Topic 8: Perfect Competition The Firm and the Industry In the Short-Run ECO 100 W.G. Wolfson 4 Topic 8: Perfect Competition Industry Firm P 1 P 1 D SRS d P P q Q 3 4
Revenue Functions in Perfect Competition (P = P fixed ) TR = P*q Since P is constant, TR is linear AR = P*q / q = P AR is same as Price P is constant AR is constant MR = Δ TR/ Δ q MR = Δ (P*q) / Δ q = P*( Δ q) / Δ q =P Alternatively, AR is constant If Average is constant, Average = Marginal AR = MR and AR =P, so P = AR = MR 5 Topic 8: Perfect Competition ECO 100 W.G. Wolfson Short-Run Profit Max Rules Revisited for Perfect Competition 1. Produce a positive quantity?

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## This note was uploaded on 02/21/2009 for the course ECONOMICS ECO100 taught by Professor J.l.carr during the Spring '08 term at University of Toronto- Toronto.

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lectureOutline08 - Introduction to Economics Source: LR12,...

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