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Unformatted text preview: Ryan Oprea Econ 200, Fall 2008 www.ryanoprea.com/econ200 1. Competitive Markets I. The Economic Environment A. The first task in applying economic theory is to describe the economic environment in a way that is as simple as possible without leaving out any important elements. We usually do this by making a bunch of assumptions. B. Traditional assumptions of competitive analysis: 1. Lots of buyers and sellers 2. with a whole lot of information about one another 3. all selling the same product 4. with no barriers to their activity. Actually we dont need the second or third assumptions (Ill provide some evidence later). C. Market Demand Curve 1. A schedule showing the number of units demanded by the market as a function of the price charged. a. This in turn is just the sum of the individual demand curves from everyone in the market. b. Individual demand curves give the number of units an individual demands as a function of the price he must pay. Ex: Demand in the Discrete Goods Model 2. Usually we assume there are lots of units demanded and so we represent demand as a contin- uous function. Ex: Linear Demand: q d = a- bp Ex: Log-linear demand: ln ( q d ) = ln ( a ) + d ln ( p ) D. Market Supply Curve 1. A schedule showing the number of units offered by the market for sale as a function of the price charged. a. This in turns is just the sum of the individual supply curves from everyone in the market. b. Individual supply curves are actually the marginal cost curve of a firm (note however that no firm will supply at prices below their average variable cost). Ex: Supply in the Discrete Goods Model 2. We usually end up assuming lots of firms and represent supply as a continuous function as well....
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