eco200_competitivemarkets_fall2009

eco200_competitivemarkets_fall2009 - ECO 200 Microeconomic...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
ECO 200: Microeconomic Theory Lecture notes on perfectly competitive markets, competitive equilibrium and taxation 1 Fall 2009 Carlos J. Serrano 1 Lecture notes updated on Nov. 3, 2009 at 11.26pm 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Summary Perfectly competitive markets and equilibrium Pro f t maximization Short run (and f rm supply curve) choosing output shut-down rule f rm and market supply curve Long run choosing output shut-down rule f rm and market supply curve Taxation and other economic policies in perfectly competitive markets Consumption taxes Burden of taxes Introduction to optimal taxation 2
Background image of page 2
1 Perfectly competitive markets and equilibrium 1.1 Perfectly competitive markets The model of perfect competition is created under three basic assumptions: 1. Price taking. Consumer and f rm take prices as given, i.e., they cannot a f ect prices. 2. Product homogeneity. We will assume that f rms produce an homogenous product. 3. Free entry and exit. We will consider than in the long run there is free entry and exit of f rms. 4. Equal access to resources. 1.1.1 Pro f t maximization We will assume that the objective of a f rm is to maximize pro f ts. De f nition 1 Pro f ts are de f ned as ( )= ( ) ( ) where ( ) is the revenue of selling units of output, and ( ) is the (minimum) cost of producing units of output. De f nition 2 The maximization problem of a f rm max ( ) ( ) Pro f t maximizing output Solving the problem implies that pro f ts are maximized at the level of production wherethemarg ina lrevenueequa lsthemarg ina lcost  ( )=  ( ) where  ( ) is the marginal revenue of ,and  ( ) is the marginal cost of
Background image of page 3

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

View Full DocumentRight Arrow Icon
Therefore, the pro f t maximizing output is such that the marginal cost at is equal to the price. =  ( ) Output rule :i fa f rm is producing any output, it should be producing at the level in which the  equals the  ____________________________ NOTE: Consider a f rm. They will stop producing output at the level that maximize pro f ts. That is a = such that ( ) =0 we know that ( ) = ( ) ( ) So is such that ( ) = ( )  ( )=  ( ) In perfectly competitive markets f rms take prices as given, then =  ( ) ____________________________ E f ects of changes in price of inputs in the optimal quantity produced Sup- pose that the market price is  Theoutputruledictatesthat 1 is such that =  1 ( 1 ) .
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/10/2010 for the course ECO ECO200 taught by Professor Carlosserrano during the Spring '10 term at University of Toronto.

Page1 / 23

eco200_competitivemarkets_fall2009 - ECO 200 Microeconomic...

This preview shows document pages 1 - 5. Sign up to view the full document.

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