L07 - ECO ECO 100Y Introduction to Economics Lecture 7...

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ECO 100Y Introduction to Economics Lecture 7: Sh R C titi Short Short-Run Competitive Run Competitive Equilibrium © Gustavo Indart Slide 1
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Assumptions of Perfect Competition ! There are many firms in the industry selling a homogeneous produc homogeneous product ! There are many buyers ! There are no restriction to entry into the industry ! Firms already in the industry have no advantage over potential entrants ! Firms and buyers are completely informed about the pri f th pr d t f h firm in th ind tr © Gustavo Indart Slide 2 prices of the products of each firm in the industry
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The Firm’s Demand Curve ! Since firms are price takers in a perfectly competitive market, they can sell any output at the given price " That is, since the output of any firm is too small relative to the industry’s output, firms can sell any relative to the industry s output, firms can sell any output without affecting the market price ! Since firms receive the same fixed price for any level of output, perfectly competitive firms face a horizontal demand curve at the level of the market pric demand curve at the level of the market price " That is, competitive firms face a perfectly elastic d d ( l ti it ! © Gustavo Indart Slide 3 demand curve (elasticity = )
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Industry and Firm Demand Curves Industry Firm PP S P 1 P 1 d Q q D © Gustavo Indart Slide 4
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Firms Are Price Takers ! Suppose that there are 1,000 firms of equal size producing a particular good ! Even if one firm were to double its output (which is a large increase for the firm), industry output would rise by only 1/1000 or 0 1 percen or 0.1 percent ! If, for instance, the industry price elasticity of demand were 0.5, then a 0.1% increase in output would cause the price to fall by only 0.2% % " Q % " Q 0.1% !
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This note was uploaded on 08/11/2011 for the course ECON 100 taught by Professor Carr during the Summer '10 term at University of Toronto.

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L07 - ECO ECO 100Y Introduction to Economics Lecture 7...

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