Econ 281 Chapter9a - Chapter 9: Perfect Competition Thus...

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1 Chapter 9: Perfect Competition Thus far we have examined how the consumer and firm attempts to optimize their decisions The results of this optimization depend on the make-up of the economy In this course we will examine the extreme make-ups: Perfect Competition and Monopoly
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2 1) Fragmented Industry -Many buyers and sellers -No one buyer or seller has an effect on the  industry -Each firm and consumer is a price taker  (takes prices as given) 2) Homogeneous products -All firms produce identical products -No quality differences, no brand loyalty
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3 3) Perfect Information -Buyers and sellers have full information on  prices  4) No barriers to entry or exit -No input is restricted to potential customers or  firms -Any firm or customer can enter the market in  the long run
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4 As a result, we have: Many buyers and sellers Buying and selling identical goods At a given, set price. Note: although we are assuming a market for  outputs, a similar analysis applies to the  market for inputs
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5 As seen before, Accounting Costs = Explicit Costs Economic Costs = Explicit Costs + Implicit Costs Furthermore, Accounting Profit = Revenue – Explicit Costs Economic Profit = Revenue – Explicit Costs   - Implicit Costs
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6 Economic Costs Revenue Economic Profit Implicit Costs Explicit Costs Revenue Accounting Profit Explicit Costs Economist’s View Accountant’s View Profit: Economists vs Accountants
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7 Implicit Costs are the BEST ALTERNATIVE  return of ALL of an agent’s input (time, money,  etc). Alternately, an agent’s time could earn a wage  elsewhere. (ie: Work at Simtech for $3000 a month) An agent’s money both isn’t used currently and  can be used elsewhere. (ie: Investing $5,000 at 10% instead of starting a 
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8 Mikey opens up a specialized mousepad company. Spending $5,000 a month on space and supplies,
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Econ 281 Chapter9a - Chapter 9: Perfect Competition Thus...

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