Ch 11 - Perfect competition

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

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Ch. 11 Ch. 11 Perfect competition Perfect competition Olivier Giovannoni ECO 304K: Introduction to  microeconomics
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: 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   2
Background image of page 2
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: perfect competition  Ch. 11 – Perfect competition   3
Background image of page 3

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

View Full DocumentRight Arrow Icon
The situation of perfect competition implies that: a. Each producer faces a horizontal demand curve  (perfectly elastic demand at the firm or individual  level).  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 interaction of supply and demand. b. Marginal revenue = price      Why?   First, remember the definitions Total revenue  is the total quantity 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   4 1. What is perfect competition?  1. What is perfect competition?  (…) (…)
Background image of page 4
So why is MR = p?  Because marginal revenue is the slope of the total  revenue curve; yet we know that this 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: 
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 43

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

This preview shows document pages 1 - 6. Sign up to view the full document.

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