Chapter 11 12 13

Chapter 11 12 13 - Chapter 11 A. Perfect competition 1)...

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Chapter 11 A. Perfect competition 1) Market structure a) Many small buyers and sellers- small relative to the size of the market, no control over market price b) Homogenous good- the good which is being sold in the market, when one seller is selling exactly the same as the next seller; as a buyer you only care about price and don’t care about who buying it from, demand for this good is perfectly elastic c) Perfect information- all of the buyers in the market know what is being offered for sale, also all sellers know what other sellers are selling; since buyers only care about price and sellers know what other sellers are charging, can a seller charge a higher price than other sellers and still have customers? No, buyers will go to other sellers. Price Taker d) No barriers to entry/exit- any seller that want to come in and sell a good can and anyone who wants to leave can do so whenever they want; the implication in the long run, economic profits in a perfectly competitive market will be =0 2) Firm behavior in the short run: How much to produce? Firms face both fixed and variable costs a) Case 1: P > ATC i) Equilibrium quantity will be > 0 ii) Profit is positive b) Case 2: P = ATC i) Equilibrium quantity will still produce, > 0 ii) Profit = 0 c) Case 3: ATC > P ≥ AVC i) Equilibrium quantity > 0 ii) Profit < 0 (1) Economic profit is negative but = to firm’s FC, you lose less by continuing to produce d) Case 4: P < AVC i) Equilibrium quantity =0 ii) Profit < 0 (1) Can’t cover FC or VC so in this case they need to shut down e) Conclusions- on a perfectly competitive market, any firm in the short run, anything can happen in the short run 3) Firm behavior: short run to long run a) Case 1: P > ATC i) Entry: this will draw entry into the market; there will be entry until EconProfit = 0
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This note was uploaded on 05/09/2011 for the course ECON 2000 taught by Professor Roussell during the Spring '06 term at LSU.

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Chapter 11 12 13 - Chapter 11 A. Perfect competition 1)...

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