Lecture18 - Announcements HW7 Due Monday HW7 Due Monday...

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nnouncements Announcements W7 ue onday HW7 Due Monday Monday is review Exam Wednesday Practice problems up today. 1of 33
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h f t Shoe factory P MC Here, we set marginal enefit=marginal cost VC AC MC 2 ere we minimize benefit=marginal cost P 4 AVC P 3 Here, we minimize total costs D P 1 P 2 Here, we maximize consumer surplus! Q Q Q Q Q P 0 0 1 3 2 2of 31 Here, we minimize variable costs
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cially optimal output Socially optimal output the marginal benefit > marginal cost, more If the marginal benefit > marginal cost, more shoes should be produced. the marginal benefit < marginal cost, fewer If the marginal benefit marginal cost, fewer shoes should be produced. the marginal benefit = marginal cost, you’ve If the marginal benefit marginal cost, you ve found the socially optimal number of shoes to produce. This occurs where MC intersects the demand curve and is the Efficient allocation of resources spent on making shoes. 3of 33
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hat a firm WILL do What a firm WILL do So we know what a firm SHOULD do to be socially “efficient” (Set Q such that MC=P) But firms don’t maximize social welfare, they ii fit maximize profits. Now let’s look at what a firm WILL do. To do this, we have to state some rules about how the market operates. e first thing we do (and the easiest) is to The first thing we do (and the easiest) is to assume that the market is “perfectly mpetitive” co pet t e 4of 33
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ERFECT COMPETITION PERFECT COMPETITION 5of 33
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THE PRODUCTION PROCESS: THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS Perfect Competition perfect competition An industry structure in which there are many firms, each small relative to the industry, producing virtually identical (homogeneous) products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter and exit the market. omogeneous products ndifferentiated products; homogeneous products Undifferentiated products; products that are identical to, or indistinguishable from, one another. 6of 33
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Perfect Competition (PC) Five characteristics of perfectly competitive markets: 1. Firms can change their level of output w/o affecting the rice. (Individual firms are very small relative to all price. (Individual firms are very small relative to all other sellers combined). Put another way, there are many consumers and many firms. They are “price kers”. takers . 2. Homogeneous products. 3. Everyone has access to full information. 4. Unrestricted entry and exit to the market, but not necessarily free (zero price). lso prices are not fixed or regulated by the state 5. Also, prices are not fixed or regulated by the state 7of 33
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Five Characteristics of Perfect Competition any small firms “ ricetakers” Many small firms pricetakers This first characteristic implies the single firm’s emand curve is very elastic We will assume demand curve is very elastic. We will assume the firm’s demand curve is perfectly elastic.
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Lecture18 - Announcements HW7 Due Monday HW7 Due Monday...

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