competition

competition - Perfect Competition & Welfare Outline...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Perfect Competition & Welfare
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Outline ± Derive aggregate supply function ± Short and Long run equilibrium ± Practice problem ± Consumer and Producer Surplus ± Dead weight loss ± Practice problem
Background image of page 2
± Focus on profit maximizing behavior of firms ± Take as given the market demand curve Equation: P = A - B.Q linear demand Equation: P = A - B.Q linear demand ± Inverse demand function: willingness to pay Maximum willingness to pay Maximum willingness to pay $/unit Quantity A A/B Demand P 1 Q 1 Constant slope Constant slope At price P 1 a consumer will buy quantity Q 1 At price P 1 a consumer will buy quantity Q 1
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Perfect Competition ± Firms and consumers are price-takers ± Firm can sell as much as it likes at the ruling market price ² do not need many firms ² do need the idea that firms believe that their actions will not affect the market price ± Therefore, marginal revenue equals price ± To maximize profit a firm of any type must equate marginal revenue with marginal cost ± So in perfect competition price equals marginal cost
Background image of page 4
MR = MC ± Profit is π (q) = R(q) - C(q) ± Profit maximization: d π /dq = 0 ± This implies dR(q)/dq - dC(q)/dq = 0 ± But dR(q)/dq = marginal revenue ± dC(q)/dq = marginal cost ± So profit maximization implies MR = MC
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Perfect competition: an illustration $/unit Quantity $/unit Quantity D 1 S 1 Q C AC MC P C P C (b) The Industry (a) The Firm With market demand D 1 and market supply S 1 equilibrium price is P C and quantity is Q C With market demand D 1 and market supply S 1 equilibrium price is P C and quantity is Q C With market price P C the firm maximizes profit by setting MR (= P C ) = MC and producing quantity q
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 19

competition - Perfect Competition & Welfare Outline...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online