SIMON FRASER ECON290 Lecture Notes - Perfect Competition (2)

SIMON FRASER ECON290 Lecture Notes - Perfect Competition (2)

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

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

View Full DocumentRight Arrow Icon
If P < MPC, produce less. To max gains from trade, Production level @ P = MPC = MSC
Background image of page 2
Background image of page 3

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

View Full DocumentRight Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

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 &gt; MSC. DWL Externalities MPC MSC Or MPB MSB Public Goods MSB &gt; MSC 4...
View Full Document

Page1 / 4

SIMON FRASER ECON290 Lecture Notes - Perfect Competition (2)

This preview shows document pages 1 - 4. Sign up to view the full document.

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