PerfectCompetition-Introduction

PerfectCompetition-Introduction - BB.L. Boulier .L. Boulier...

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Unformatted text preview: BB.L. Boulier .L. Boulier Handout 8: 8: Perfect Competition Handout Perfect Competition I. Introduction I. Introduction Perfect Competition I. Market Structure II. Market Structures II. Market Structures In thinking about different types of markets it is useful to distinguish two important features In thinking number of firms in the markets and (2) the characteristics of the good. of industries: (1) theabout different types of industry it is useful to distinguish two important features of industries: (1) the number of firms in the industry and (2) the characteristics of the good. Cases: Monopoly, Oligopoly, Perfect competition, Monopolistic competition. Cases: Monopoly, Oligopoly, Perfect competition, Monopolistic competition. III. Goals of Firms III. Goals of Firms In general, we will assume that firms attempt to maximize economic profits. In general, we will assume that firms attempt to maximize economic profits. Definition of economic profits: Definition of economic profits: Economic Profit = Total Revenue - Economic Cost Economic Profit Total Revenue - - Economic - Implicit cost Economic Profit = = Total RevenueExplicit Cost Cost Economic Profit = Total Revenue - Explicit Cost - Implicit cost Implicit cost = the value of resources (financial and managerial) supplied by the owners of Implicit no = the value of resources (financial and of these resources can be measured the firm for whichcost explicit payments are made. The value managerial) supplied by the owners of the firm for the opportunity cost of using the resour The the business. resources can be measured by calculatingwhich no explicit payments are made. ces in value of these(E.g., if owner is also the by calculating the what salary could using the resources in the business. someone else? If the manager of the firm,opportunity cost ofhe or she have earned by working for(E.g., if owner is also the assets owned the the firm aresalary could he or she have earned by workingearned?) manager of by firm, what rented to someone else, what could they have for someone else? If the assetsNormal by the= implicitrented thesomeone else, what could they have earned?) supplied owned profit firm are cost = to return that could have been earned on resources by owners of firm. Normal profit = implicit cost = the return that could have been earned on resources supplied by owners of firm. Example: TR = $10 million Example: TR = $10 million Accounting Cost (Explicit Cost) = $6 million Accounting Cost (Explicit Cost) = $6 million Owner has supplied $5 million of capital to firm on which he could have earned 20% in alternative uses. (Thus, implicit cost = $1 million.) Owner has supplied $5 million of capital to firm on which he could have earned 20% in alternative uses. (Thus, implicit cost = $1 million.) Economic Profit: = $10 - $6 - .2 * $5 = $3 million Economic Profit: = $10 - $6 - .2 * $5 = $3 million Reasons for assumption of profit maximizaton. Reasons for assumption of profit maximizaton. 7 What happens if the price of an input changes? (Say the price of labor falls.) 2 III. Perfect Competition Application: Allocation of Production among Multiple Plants Examination of price an output decisions by the firm and industry supply in the short-run and long-run. Yet another approach. Maximize output for each level expenditures. Short-Run: Firms (1) some Rearrange Equation haveas: fixed inputs, number of firms fixed. Long-Run: Firms have no fixed inputs and firms can enter or exit the industry. (3) Characteristics of Perfect Competition: a. Identical products for all firms (rice, wheat) - homogeneous b. Each firm is small relative to market size. What this means is that if an individual firm or, maximum output, given expenditures, is obtained when the marginal product of an input produces more or less output, it is so small relative to market size, that these changes in output have per dollar effect on the input is of the good. essentially nospenton the market price the same. c. Firms and consumers are knowledgeable about prices and qualities of goods. d. Freedom of entry and exit to the industry. (No artificial restrictions. © Bryan L. Boulier, 2011. All rights reserved. ...
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