Lecture 07 - ECO100 - ECO 100Y ECO 100Y Introduction to...

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Unformatted text preview: ECO 100Y ECO 100Y Introduction to Introduction to n m i n m i Economics Economics Lecture 7: Lecture 7: hort hort un Competitive un Competitive Short Short-Run Competitive Run Competitive Equilibrium Equilibrium © Gustavo Indart Slide 1 Assumptions of Perfect Competition Assumptions of Perfect Competition ¡ There are many firms in the industry selling a omogeneous product homogeneous product ¡ There are many buyers ¡ There are no restriction to entry into the industry ¡ Firms already in the industry have no advantage over potential entrants ¡ Firms and buyers are completely informed about the ri f th pr d t f h firm in th ind tr © Gustavo Indart Slide 2 prices of the products of each firm in the industry The Firm’s Demand Curve The Firm’s Demand Curve ¡ Since firms are price takers in a perfectly competitive market, they can sell any output at the given price g ¾ That is, since the output of any firm is too small lative to the industry’s output, firms can sell any relative to the industry s output, firms can sell any output without affecting the market price ¡ Since firms receive the same fixed price for any level of output, perfectly competitive firms face a horizontal emand curve at the level of the market price demand curve at the level of the market price ¾ That is, competitive firms face a perfectly elastic d ( l t i i t © Gustavo Indart Slide 3 demand curve (elasticity = ∞ ) dustry and Firm Demand Curves dustry and Firm Demand Curves Industry and Firm Demand Curves Industry and Firm Demand Curves Industry Firm P P S P 1 P 1 d D © Gustavo Indart Slide 4 Q q Firms Are Price Takers Firms Are Price Takers ¡ Suppose that there are 1,000 firms of equal size producing a particular good ¡ Even if one firm were to double its output (which is a large increase for the firm), industry output would rise by only 1/1000 r 0 1 percent or 0.1 percent ¡ If, for instance, the industry price elasticity of demand were 0.5, If, for instance, the industry price elasticity of demand were 0....
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