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Unformatted text preview: COMPETITION AND EFFICIENCY 1 COMPETITION AND EFFICIENCY P = MC MWTP = MC Optimal Output 2 1 Other benefits: Profit = 0 No transfer from consumers to producers. Producers paid their costs and no more. People pay the cost of the good. People pay the lowest possible cost. P = AC P = min AC No waste. New technologies are adopted.
7 Three important distinctions: Firm d compared to market D Supply curve in stage 2 equilibrium When competition is feasible 8 2 Firm demand vs. Market demand:
MC P* d P* D q* Firm Q* Market d for firm’s price changing given other firms charge P*. D for all firms’ prices changing together. 10 Firm demand vs. Market demand:
MC P* d P* D q* Firm Q* Market Homogenous product gives flat d, even with few firms.
11 3 But what if firms colluded?
MC P* d P* D/N D Q* Market q* Firm Collusion is infeasible with many firms. So firm uses d. 13 Homog prod Flat d Many firms Firm uses d Free entry/exit Profit=0, P=AC P=MC P=minAC
14 4 Market supply curves in competitive industry: 1. Supply curves with fixed number of firms. 2. Supply curve with entry and exit. $
MC AC $ SI S2 p* q Firm Market Q
16 IMPACT OF A SHIFT IN DEMAND
AC $ P* D1 D2 q* Q* Q** Firm Market Equilibrium price does not change. Output of each firm does not change. Number of firms and market output changes.
21 5 IMPACT OF A SHIFT IN DEMAND
$ P* D1 S D2 Q1 Q2 Market Equilibrium price does not change. Output of each firm does not change. Number of firms and market output changes. 22 IMPACT OF EXCISE TAX t p2 p1 D q1 = q2 Firm Q2 Q1 Market
AC2 AC1 Equilibrium price rises by the amount of tax. Output of each firm does not change. Firms leave the market; market output drops. 27 6 $ p2 t p1 IMPACT OF EXCISE TAX S2 t S1 D Q Market Equilibrium price rises by the amount of tax. Output of each firm does not change. Firms leave the market; market output drops. 32 When should we promote competition? 33 7 Equilibrium shown on two graphs:
AC P** D q** Firm Q** Market 34 Equilibrium shown on one graph:
AC P** D 35 8 Min AC occurs at small share of market output: Competition is the only possible outcome. AC D Many firms in equilibrium.
37 Min AC is large relative to market demand: Competition is impossible. AC D 38 9 AC has large flat area: Competition is possible but not the only possible outcome. AC D Many or few firms in equilibrium.
39 To promote competition:
prevent growth of large firms when many small firms are possible. facilitate entry and exit 40 10 ...
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This note was uploaded on 11/28/2010 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.
- Fall '08