marketsmanual

Marketsmanual - Markets Manual Purpose of the Program This program allows you to manipulate a perfectly competitive market in a number of ways In

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Markets Manual Purpose of the Program This program allows you to manipulate a perfectly competitive market in a number of ways. In the process you can observe some of the ways this type of market reacts to assorted disturbances. The program also allows you to interfere with the market, as governments often do, and to observe the consequences of your interference. This should allow you to draw some conclusions about the usefulness of such interventions. The Basic Model The market you are about to disturb is the market for wheat. If people like you don't get in the way, this comes very close to the economist's definition of a "perfectly competitive market." Below is a comparison of the requirements of "perfect competition" and the facts about the wheat market. Perfect Competition Wheat Market An infinite number of sellers (firms or individuals) Tens of thousands of farms in the U.S., many more in other countries An infinite number of buyers Millions of buyers (but there are a few large firms that buy large amounts of the wheat produced in the U.S.) Perfect free information about prices Information is very cheap and easy to get. Every seller produces exactly the same product ad all potential buyers know that the products are identical. There are a number of different varieties of wheat, but within each variety, it doesn’t matter which farm it was grown on. Free entry into the industry (no special start up costs), and free exit, no special costs for leaving the industry. There are entry and exit costs, but they are not very large. Farmers borrow large amounts to start up, but the security is mostly the land and equipment bought, so it isn’t too hard or expensive to borrow. Supply
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Suppliers—those prepared (if conditions are right) to sell a given product in this market—are assumed to be business firms. The suppliers, wheat farmers in this module, are assumed to be motivated by only one thing: profit . Ignoring all sorts of potential complexities, profit is defined as the total revenues of the firm minus the total costs of the firm. The amount of product that any firm is willing to sell depends on two things: the price of the product and the firm’s costs. Due to the special conditions of the perfectly competitive model the firm considers the price of the product to be a fixed value -- totally out of its control. The firm’s costs depend on how much it produces. The costs also depend on technology, resource prices, laws, and other matters, but those will be considered constant here. In the short term firms are unable to change many of the resources they use in production—they can neither increase nor decrease the amount used. Example: the size of the building they have as a production facility. As a result, they are subject to the Law of Diminishing Marginal Returns. If they try to increase production, they add more and more of the resources they can control to the fixed amounts of the ones they cannot control. The result is that increasing
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This note was uploaded on 07/05/2011 for the course ECON 1 taught by Professor Nagata during the Spring '08 term at UCLA.

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Marketsmanual - Markets Manual Purpose of the Program This program allows you to manipulate a perfectly competitive market in a number of ways In

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