Lecture10 - Lecture 10: Competition in the Short Run Perlo/...

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Unformatted text preview: Lecture 10: Competition in the Short Run Perlo/ Chapter 8 Vladimir Petkov VUW 19 April 2010 Vladimir Petkov (VUW) Lecture 10: Competition in the Short Run 19 April 2010 1 24 Requirements for Perfect Competition 1 A high number of &rms in the market. The inuence of an individual &rm on the whole industry is negligible. 2 Consumers believe that all &rms sell identical products . Goods are perfect substitutes: there are no di/erences in quality, brands are not important, etc. 3 Firms freely enter and exit the market (in the long run). There are no barriers to entry such as entry costs, legal obstacles, etc. 4 Buyers and sellers know the prices charged by all &rms. All agents have perfect information. 5 Transaction costs are low . The expenses of &nding a partner and making a trade are negligible. Examples of industries that satisfy these requirements: wheat, cement, etc. Vladimir Petkov (VUW) Lecture 10: Competition in the Short Run 19 April 2010 2 24 Price Taking Behavior One of the most important features of perfect competition is that &rms take prices as given. Because of this, competitive &rms are often called price takers . There are many &rms operating in the industry. So each &rm alone is too smallto a/ect the price. The total (industry) demand is usually downward sloping. However, from the viewpoint of any given &rm, its residual demand is horizontal Each &rm faces a perfectly elastic residual demand curve. No matter how much output a single &rm sells, it cannot change the price it faces! Vladimir Petkov (VUW) Lecture 10: Competition in the Short Run 19 April 2010 3 24 Price Taking Behavior (Continued) The residual demand at any given price is the horizontal di/erence between market demand and the supply of all other &rms: D r ( p ) = D ( p ) & S o ( p ) . If there are n identical &rms, &rm i s elasticity of demand is i = n & ( n & 1 ) o , where is the elasticity of market demand and o is the elasticity of supply of each of the other &rms. If n is big, i & . For example, if n = 78 , = & 1.1 and o = 3.1 , then the elasticity of residual demand of each &rm is i = [ 78 ( & 1.1 )] & [ 77 3.1 ] = & 324.5 ....
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This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.

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Lecture10 - Lecture 10: Competition in the Short Run Perlo/...

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