3.PerfectComp - Perfect Competition PERPECT...

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IMPERPECT COMPETITION OLIGOPOLY MONOPOLY COURNOT BERTRAND PERPECT COMPETITION (price taking behavior) Decision: quantity produced (each firm faces residual demand) (facing market demand curve ) Decision: quantity Decision: price Perfect Competition Outline ± Definition ± Firm’s Problem in a PC Market ± Non-increasing returns to scale ± Demand elasticity residual demand curve ± Perfect competitive equilibrium A perfectly competitive market is where agents in the market (buyers and sellers) are price takers . Price taking behavior : agents believe that the market price is given and their actions do not influence the market price. Perfect Competition ± Perfect Competition is often used as a benchmark. As a benchmark, it is very convenient, but one does not often believe the assumption of perfect comp in reality. Assumptions behind PC ± Homogeneous goods ± Perfect information ± Price taking ± A belief that no firm has a significant effect ± No transaction costs ± No externalities (i.e., no pollution-firms internalize the full cost of their behavior) ± Free entry and exit ± Perfectly divisible output ± The assumption of competitive behavior relates only to agents’ beliefs , and is independent of how many firms in the market. ± As long as the agents behave competitively, the competitive equilibrium price can be solved for any number of buyers and sellers. ± When there is a large number of sellers, equilibrium price for some imperfectly competitive market structures converges to competitive price.
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This note was uploaded on 10/27/2008 for the course ECON 434 taught by Professor Work during the Spring '08 term at Harvard.

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3.PerfectComp - Perfect Competition PERPECT...

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