Lecture 07 - ECO 100Y Introduction to Economics Lecture 7:...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Economics Introduction to Economics Lecture 7: Lecture 7: Short Short - - Run Competitive Run Competitive Equilibrium Equilibrium
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© Gustavo Indart Slide 2 Assumptions of Perfect Competition Assumptions of Perfect Competition ± There are many firms in the industry selling a homogeneous product ± There are many buyers ± There are no restriction to entry into the industry ± Firms already in the industry have no advantage over potential entrants ± Firms and buyers are completely informed about the prices of the products of each firm in the industry
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© Gustavo Indart Slide 3 The Firm’s Demand Curve The Firm’s Demand Curve ± Since firms are price takers in a perfectly competitive market, they can sell any output at the given price ¾ That is, since the output of any firm is too small relative to the industry’s output, firms can sell any output without affecting the market price ± Since firms receive the same fixed price for any level of output, perfectly competitive firms face a horizontal demand curve at the level of the market price ¾ That is, competitive firms face a perfectly elastic demand curve (elasticity = )
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© Gustavo Indart Slide 4 Industry and Firm Demand Curves Industry and Firm Demand Curves Industry Firm PP D S Q q d P 1 P 1
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© Gustavo Indart Slide 5 Firms Are Price Takers Firms Are Price Takers ± Suppose that there are 1,000 firms of equal size producing a commodity ± Even if one firm were to double its output (which is a large increase for the firm), industry output would rise by only 1/1000 or 0.1 percent ± If, for instance, the industry price elasticity of demand were 0.5,
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Lecture 07 - ECO 100Y Introduction to Economics Lecture 7:...

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