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lec06 - p = MC MWTP = MC Social Optimum 22 $ $ D MC = s P Q...

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1 1 COMPETITION 2 Conditions for Competition 1. Many small firms. 2. Homogeneous product. 3. Free entry and exit. 4. All firms face same costs. 3 FIRM’S CHOICE OF OUTPUT 5 Suppose market price is set. The firm faces a flat demand curve at the market price. $ q d p 1 6 Competitive firm chooses output level at which P = MC. $ q MC d p 1 q* 7 MC curve is firm’s Supply curve. $ q MC = s d p q*
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2 8 BUT: How is market price determined? STAGE 1: Number of firms is fixed. STAGE 2: Entry and exit of firms. 12 Market supply curve is sum of all firms’ MC curves. Firm Market $ $ Q q MC = s S = Σ MC q 1 p 1 N • q 1 13 STAGE 1: Equilibrium with no entry or exit 17 $ $ D MC = s q Q Firm Market S = Σ MC 21 $ $ D MC = s P * Q * q Q Firm Market S = Σ MC d q * Equilibrium with no entry or exit: Result:
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Unformatted text preview: p * = MC MWTP = MC Social Optimum 22 $ $ D MC = s P * Q * q Q Firm Market S = Σ MC d q * Equilibrium with no entry or exit: Note: Q* = N • q * 3 23 Profits can be positive or negative before there is entry or exit. Positive profits: P* AC * q* MC AC S D Firm Market 24 Negative profits: AC* q* MC AC S D Firm Market Loss P* 25 Stage 2: Firms can enter or exit. 26 q 1 MC AC S 1 D Firm Market Q q $ P 1 Initially, firms earn profit. 28 q 3 MC AC S 1 D Firm Market Q S 2 S 3 q $ P 1 p 2 p 3 30 Equilibrium with free entry and exit: P** q** MC AC D Firm Market Q** MWTP = P = MC = AC = min AC N* * = Q * * Profit = 0. q * *...
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