SIMON FRASER ECON290 Lecture Notes - Perfect Competition (2)

# SIMON FRASER ECON290 Lecture Notes - Perfect Competition (2)

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Perfectly Competitive Market (chapter 2) Markets are perfectly competitive when (1) All productive resources are privately owned, (2) All firms offer identical products, (3) All consumers and producers are price takers, (4) All economic agents have symmetric information, and (5) Market participation is costless. In the perfectly competitive market, MPB = MSB, and MPC = MSC. 1. Theory of Demand How the self-interested consumers choose the level of consumption to maximize gains from trade? If MPB > P, consumer should increase the consumption. If MPB < P, consumer should decrease the consumption To max the gains from trade, the optimal consumption level should be @ P = MPB = MSB D=MSB Q P 2. Theory of Supply Firms choose the level of production to max gains from trade. If P > MPC, produce more. 1

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If P < MPC, produce less. To max gains from trade, Production level @ P = MPC = MSC

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Unformatted text preview: S=MSC Q P 3. Competitive Equilibrium P* Q* D=MSB S=MSC Q P In the competitive equilibrium, MSB = MSC. Competitive equilibrium allocation is Perato efficient. (1 st Welfare Theorem) All gains from trade are exploited in the competitive equilibrium. Measure of the gains from trade: Consumers’ surplus (CS) Producers’ surplus (PS) 4. Government Intervention and Perfectly Competitive Market Taxes: 2 Q’ S’ P* Q* D=MSB S=MSC Q P A per-unit tax on production decreases the supply of the product. New equilibrium quantity will be Q’. DWL (deadweight loss) Subsidies: Q* D=MSB S=MSC Q P P* Quota: Q* D=MSB S=MSC Q P P* 5. Sources of Inefficiency Monopoly 3 MR P* D=MSB S=MSC Q P Q M Q* Monopolist chooses Q M such that MR = MSC. At Q M , MSB > MSC. DWL Externalities MPC ≠ MSC Or MPB ≠ MSB Public Goods MSB > MSC 4...
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SIMON FRASER ECON290 Lecture Notes - Perfect Competition (2)

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