CHAP 11 - CHAP 11 CHAP 11 Perfect competition Perfect...

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Unformatted text preview: CHAP 11 CHAP 11 Perfect competition Perfect competition Olivier Giovannoni 304K: Introduction to microeconomics Oct. 14, 2007 Outline: Outline: 1- What is perfect competition? 2- The firms decisions in perfect competition 3- Output, price and profit 4- Changing tastes and advancing technology 5- Competition and efficiency Ch. 11 Perfect competition 2 1- What is perfect competition? 1- What is perfect competition? Perfect competition is a market situation with: 1- No entry and/or exit restriction 2- No disadvantage 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 service), which produce identical products (perf. substitutes). Ch. 11 Perfect competition 3 1- What is perfect comp.? (cont.) 1- What is perfect comp.? (cont.) The case of perfect competition implies that: Each producer faces a horizontal demand curve (elastic individual demand). This is because the producers make perfect substitutes. The market demand is downward sloping because it depends on the substitutability of the market good vs. other goods. 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. Marginal revenue = selling price. There are two reasons. But first, remember the definitions Total revenue is the total amount produced (given by productivity, technology and the prices of the factors of production) times the market price (given by S&D). 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 4 1- What is perfect comp.? (cont.) 1- What is perfect comp.? (cont.) The two reasons explaining why MR = p are: 1- marginal revenue is the slope of the total revenue curve yet we know that that slope is equal to the selling price, 2- Intuitive reasoning : 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 selling price of that extra unit....
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This note was uploaded on 03/19/2008 for the course ECON 304K taught by Professor Ledyard during the Fall '08 term at University of Texas at Austin.

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CHAP 11 - CHAP 11 CHAP 11 Perfect competition Perfect...

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