03-Competition

03-Competition - Competition Econ 425, Summer I 2008 Intro...

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Competition Econ 425, Summer I 2008
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2 Intro b What do we understand by perfect competition? b How do competitive firms maximize profit? b SR and LR equilibrium. b Desirable properties of competitive markets. b Crucial role of barriers to entry and exit. b Market failures.
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3 Perfect competition model b Benchmark to compare with other models. b Assumptions: - homogenous good; - price taking; - free entry and exit; - no transaction costs: no costs or fees to participate in market; - no externalities: each firm bears the full cost of its production process; - perfect information: agents have all relevant information.
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4 Behavior of single firm Profit Maximization MC ) ( ) ( = = p q C pq q Max q π P MC AVC AC AR=MR=p 0 p 0 q q*
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5 Behavior of single firm (2) Shutdown decision b If all fixed costs are non recoverable, produce if p > AVC. Why? Example : A bakery has fixed costs of $100 per day (non recoverable) and variable costs of $1 per loaf. Its oven can handle up to 50 loaves per day and it is impossible to obtain additional capacity. What should the bakery do if p = $1, $0.5, or $1.5? b If all fixed costs are recoverable, produce if p > AC.
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6 Short Run equilibrium - Firm SR supply curve is portion of MC above shutdown point (p s ). - SR market supply curve is horizontal sum of each firm’s supply curve (n identical firms).
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This note was uploaded on 05/01/2011 for the course ECON 425 taught by Professor Watugala during the Spring '06 term at Texas A&M.

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03-Competition - Competition Econ 425, Summer I 2008 Intro...

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