Micro.Week7.2007 - 7/1 PERFECT COMPETITION One model of how...

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7/1 PERFECT COMPETITION One model of how the economy works The actual assumptions behind supply and demand Assume: 1. many firms (atomistic) / price takers 2. homogeneous product 3. perfect information, no transaction costs / law of one price 4. free entry and exit in long run
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7/2 Remember, / = TR - TC = Pq - TC d/ /dq = P - MC = 0, so P = MC Go back to old example TC = 400 + 5q + q 2 q/ 2 FC = 300 min AC = 45 at q = 20 min AVC = 25 at q = 10 Suppose P = 51 q = / = Suppose P = 47 q = / =
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7/3 Suppose P = 45 q = / = Suppose P = 35 q = / = Suppose P = 27 q = / = BUT, suppose P = 23 q = / = So rule in short run is P = MC, so long as / > / TFC
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7/4 We can do this even more simply: so long as Pq - TC > -TFC Pq - TVC - TFC > / TFC Pq - TVC > 0 Pq > TVC P > AVC LOGIC: “sunk costs” are gone “don’t throw good money after bad”
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7/5 Diagram: Supply curve of firm: MC above AVC
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7/6 Another example TC = 36 + 2q + q 2 q/ 2 FC = 20 Draw supply curve of firm
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7/7 Diagram of price vs. AC, AVC, value of profit
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7/8 Profit and loss diagrams:
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7/9 Now supply curve of industry: TC = 36 + 2q + q 2 P = 2 + 2q N = 50 P = 2 + .04Q N = 100 P = 2 + .02Q N = 200 P = 2 + .01Q N = 400 P = 2 + .005Q
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7/10 Assume demand is P = 26 - .01Q N = 400 P = 10, Q = 1600, / = -20 N = 200 P = 14, Q = 1200, / = 0 N = 100 P = 18, Q = 800, / = +28
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7/11 Now draw supply vs. demand diagram Notice that as number of firms increases, S shifts right, P fall, Q rises:
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This note was uploaded on 06/13/2011 for the course ECON A04 taught by Professor Mk during the Spring '07 term at University of Toronto- Toronto.

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Micro.Week7.2007 - 7/1 PERFECT COMPETITION One model of how...

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