ECE1010-06 - UNIT II Firms& Markets • Theory of the...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

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

Unformatted text preview: UNIT II: Firms & Markets • Theory of the Firm • Profit Maximization • Perfect Competition • Review • 11/5 MIDTERM 10/22 Perfect Competition Is it true that the rational pursuit of private interests produces coherence rather than chaos, and if so, how is it done?-- Frank Hahn Adam Smith described a world in which market competition weed-outs inefficient behavior, so that the ‘pursuit of private interests’ is led, as if by an invisible hand , to promote the general welfare of society. Today, we will use our models of consumers, firms and markets to construct a general equilibrium and consider its welfare implications . Perfect Competition • Supply in the Long-Run • Equilibrium and Efficiency • General Equilibrium • Qelfare Analysis Perfect Competition Assumptions • Firms are price-takers : can sell all the output they want at P*; can sell nothing at any price > P*. • Homogenous product : e.g., wheat, t-shirts, long- distance phone minutes. • Perfect factor mobility : in the long run, factors can move costlessly to where they are most productive (highest w, r). • Perfect information : firms know everything about costs, consumer demand, other profitable opportunities, etc. Perfect Competition In the Long-run… 1) Firms produce at minimum average cost, i.e., “efficient scale.” 2) Price is equal to marginal cost. 3) Firms earn zero (economic) profits. 4) Market equilibrium is Pareto-efficient. Perfect Competition The Short-run & the Long-run In the short-run, firms adjust to price signals by varying their utilization of labor (variable factors). In the long-run, firms adjust to profit signals by – varying plant size (fixed factors); and – entering or exiting the market. Qhat determines the number of firms in the long-run? Supply in the Long-Run Short-run equilibrium with three firms. Firm A is making positive profits, Firm B is making zero profits, and Firm C is making negative profits (losses). Firm A Firm B Firm C q q q $ P MC MC MC AC AVC AC AC q: firm Q: market Supply in the Long-Run Short-run equilibrium with three firms . Firm A is making positive profits, Firm B is making zero profits, and Firm C is making negative profits (losses). Firm A Firm B Firm C q q q $ P In the long run, Firm C will exit the market. MC AC MC AC Supply in the Long-Run In the long-run, inefficient firms will exit, and new firms will enter, as long as some firms are making positive economic profits. Firm A Firm B Firm D q q q $ P MC MC AC MC AC AC Supply in the Long-Run In the long-run, if there are no barriers to entry, then new firms have access to the most efficient production technology. We call this the efficient scale . Firm A Firm D Firm E q* q q* q q* q $ P* MC MC AC MC AC AC Supply in the Long-Run The long-run supply curve. P* is the lowest possible price associated with non-negative profits, P* = AC min ....
View Full Document

This note was uploaded on 09/16/2009 for the course ECONOMICS E-1010 taught by Professor Robertneugeboren during the Fall '09 term at Harvard.

Page1 / 51

ECE1010-06 - UNIT II Firms& Markets • Theory of the...

This preview shows document pages 1 - 12. Sign up to view the full document.

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