Ch 11 - Perfect competition

Ch 11 - Perfect competition - Ch 11 Perfect competition...

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Ch. 11 Ch. 11 Perfect competition Perfect competition Olivier Giovannoni ECO 304K: Introduction to  microeconomics
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Outline: Outline: 1. What is perfect competition? 2. The firm’s decisions in perfect competition 3. Output, price and profit 4. Changing tastes and advancing technology 5. Competition and efficiency Ch. 11 – Perfect competition 
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1. What is perfect competition? 1. What is perfect competition? Perfect competition  is a market structure where: 1. There are no entry and/or exit restriction 2. There are no disadvantages for newly-established  firms 3. Sellers and buyers are well informed about prices 4. There are many buyers and sellers. This will be the  case when the  minimum efficient scale  is small  relative to demand. The  minimum efficient scale  is the production level that  corresponds to the lowest point of the LRAC curve. A small  minimum efficient scale of production guarantees that there will  be many sellers on the market (because the operating costs are  low). A large (or larger) demand means that there are many buyers. Perfect competition typically happens in sectors  with low-skill labor (esp. in agriculture and basic  services),  which produce identical products  Ch. 11 – Perfect competition 
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The situation of perfect competition implies that: a. Each producer faces a horizontal demand curve  (elastic individual demand).  This is because the  producers make perfect substitutes.  Note:  The  market  demand remains downward sloping because it  depends on the substitutability of the market good vs. other  goods. a. Firms are price takers:  because there are many  firms and a high degree of competition, firms can only  follow the ongoing price determined on the market by  the interplay of supply and demand. b. Marginal revenue = price.  First, remember the definitions Total revenue  is the total amount produced (given by  productivity, technology and the prices of the factors of  Marginal revenue  is the change in total revenue for a unit  change in production. It is the slope of the total revenue curve. Ch. 11 – Perfect competition  1. What is perfect competition?  1. What is perfect competition?  (…) (…)
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So why is MR = p?  Because marginal revenue is the slope of the total  revenue curve yet we know that that slope is equal to  the sales price (the slope of TR=p*Q is the first  derivative with respect to Q which yields p), Alternatively:  marginal revenue is the increase of total revenue when  you produce an extra unit; yet producing one extra unit yields an  increase of total revenue equal to the sales price of that extra unit. Ch. 11 – Perfect competition 
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This note was uploaded on 11/01/2008 for the course ECON 304K taught by Professor Ledyard during the Spring '08 term at University of Texas.

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Ch 11 - Perfect competition - Ch 11 Perfect competition...

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