Ch09_spr09_pam2000

# Ch09_spr09_pam2000 - PAM 2000 Intermediate Microeconomics...

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PAM 2000 Intermediate Microeconomics A. Sinan Ünür Chapter 9 Chapter 9 Perfect Competition

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Chapter 9 PAM 2000 – A. Sinan Ünür 2 Perfect Competition Many buyers, many sellers: No individual participant can exert significant influence on price. Undifferentiated products: This does not mean there are no physical differences among products but that consumers consider the products of all firms to be very close substitutes. Perfect information about prices: In a competitive industry, buyers and sellers are always looking for the best deal. Remember: All models are wrong. Some are useful. Free entry and exit: This is the condicio sine qua non of competition. Industries can be close to perfect competition even if the first three conditions are not satisfied. But, without free entry and exit, there can be no real competition.
Chapter 9 PAM 2000 – A. Sinan Ünür 3 Competitive Markets Output level and prices in a competitive market are determined by a combination of how much consumers value additional units of the product (demand curve) and how much it costs producers to produce additional units (the supply curve). Our first task is to construct the supply curve for a producer in a perfectly competitive industry. We assume all private producers choose output to maximize economic profit regardless of industry structure.

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Chapter 9 PAM 2000 – A. Sinan Ünür 4 Profit Note that the firm’s investors have other options: There are many firms they can invest in. Economic profit must take into account the opportunity cost of investing in a specific firm. π(Q) = TR(Q) – TC(Q) = TR(Q) – [ FC + TVC(Q) ] Assumption: Competitive firms take market price as given (many firms, many buyers, no individual can influence price). TR(Q) = PQ where the price P is beyond firm’s control
Chapter 9 PAM 2000 – A. Sinan Ünür 5 Profit Maximization To figure out the profit maximizing output, the firm must ask: What happens if we produce more? By producing one more unit, the firm earns P dollars It incurs an additional cost by producing that unit (marginal cost). If marginal cost is decreasing, produce more. If marginal cost is increasing: P > MC(Q) => produce more P < MC(Q) => produce less P = MC(Q) => profit maximizing output level. Can’t increase profits by changing output level.

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Chapter 9 PAM 2000 – A. Sinan Ünür 6 Short Run Costs If the firm produces nothing, it still incurs sunk costs in the short run. If it is producing a positive output level, it will incur sunk costs, non-sunk fixed costs and the variable cost of producing output level Q. We will only focus on the case where all short-run fixed costs are sunk.
Chapter 9 PAM 2000 – A. Sinan Ünür 7 Shut-Down Price The price level at which the firm is better off not producing anything at all is called the shut-down price . If the firm produces nothing, its profit is given by:

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## This note was uploaded on 05/12/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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Ch09_spr09_pam2000 - PAM 2000 Intermediate Microeconomics...

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