Lecture Notes 8

Lecture Notes 8 - 16/02/11 Given a standard market demand...

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16/02/11 Given a standard market demand supply curve in a perfectly competitive market, a firm takes an individual demand curve that is horizontal where P = MC = MR Any number of firms in the industry have the same curve that combine to make up the industry Assume that all firms look exactly – identical in their cost structure – assumption of perfect information – if one company has a special way of producing a good, all companies will pick up on this Profit is sustainable? o Over time, seeing the attractiveness of economic profit will draw other firms into the market, so that the market supply curve will shift to the right o This moves the market price to a lower point o Individual firms experience a lower price paid for their goods, MC = MR at a new point o Firm changes level of output so to produce less – profits have fallen o Given that firms are still making an economic profit, firms will continue to enter o Economic profit: cost curves include the value of time and resources o As long as a firm can make a profit, new firms will enter the industry o The price line will keep dropping until AC = MC = P where profit = 0 – long-run equilibrium o When firms begin experiencing losses, firms will have the incentive to leave the market –
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This note was uploaded on 09/08/2011 for the course ECON 101 taught by Professor Gulati during the Spring '11 term at Columbia.

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Lecture Notes 8 - 16/02/11 Given a standard market demand...

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