IE 12_ Competitive Adjustment .pdf - Page 1 of 2 Class Notes – Competitive Adjustment Competitive Adjustment The perfectly competitive industry

IE 12_ Competitive Adjustment .pdf - Page 1 of 2 Class...

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Page 1 of 2 Class Notes Competitive Adjustment 3/26/2019 7:27 AM Competitive Adjustment The perfectly competitive industry x Characteristics o Many small firms o Homogeneous product o Perfect information for consumers and producers o Thus: All firms/consumers receive/pay the same price. No individual firm has any impact on that price each firm is a price taker. o Relatively free entry and exit in the LR. But no entry or exit in the SR. x The SR industry supply curve o The horizontal sum of the supply curves of the firms their SRMC curves. o If SRMC i = SRMC i (q i ), then must solve for the q i = q i (SRMC i ). o But each firm produces where SRMC = P. So q i = q i (P) o Q S = ∑ q i (P) i . o E.g., if SRMC 1 = q 1 /2 and SRMC 2 = q 2 /4, then Q S = 2P + 4P = 6P. x The industry demand curve. x The “diagram” – initially two firms and the industry. o Draw with the initial price above LRATC. o The SR equilibrium The market clears Each firm maximizes its profit o Not a LR equilibrium as Profits > 0, which will lead to entry.
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