ch09 - Chapter 9 Perfectly Competiti ve Markets Chapter...

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Perfectly Competiti ve Markets Chapter 9
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2 Chapter Nine Overview 1. Introduction 1. Perfect Competition Defined 1. The Profit Maximization Hypothesis 1. The Profit Maximization Condition 1. Short Run Equilibrium Short Run Supply Curve for the Firm Short Run Market Supply Curve Short Run Perfectly Competitive Equilibrium Producer Surplus 1. Long Run Equilibrium Long Run Equilibrium Conditions Long Run Supply Curve Chapter Nine
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3 Chapter Nine A perfectly competitive market consists of firms that produce identical products that sell at the same price. Each firm’s volume of output is so small in comparison to the overall market demand that no single firm has an impact on the market price. Perfectly Competitive Markets
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4 Chapter Nine A. Firms produce undifferentiated products in the sense that consumers perceive them to be identical B. Consumers have perfect information about the prices all sellers in the market charge Perfectly Competitive Markets - Conditions
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5 Chapter Nine C. Each buyer’s purchases are so small that he/she has an imperceptible effect on market price. D. Each seller’s sales are so small that he/she has an imperceptible effect on market price. Each seller’s input purchases are so small that he/she perceives no effect on input prices E. All firms (industry participants and new entrants) have equal access to resources (technology, inputs). Perfectly Competitive Markets - Conditions
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6 Chapter Nine Implications of Conditions The Law of One Price: Conditions (a) and (b) imply that there is a single price at which transactions occur. Price Takers: Conditions (c) and (d) imply that buyers and sellers take the price of the product as given when making their purchase and output decisions. Free Entry: Condition (e) implies that all firms have identical long run cost functions
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7 Chapter Nine The Profit Maximization Hypothesis Definition: Economic Profit Sales Revenue - Economic (Opportunity) Cost Example: Revenues: $1M Costs of supplies and labor: $850,000 Owner’s best outside offer: $200,000
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8 Chapter Nine The Profit Maximization Hypothesis “Accounting Profit”: $1M - $850,000 = $150,000 “Economic Profit”: $1M - $850,000 - $200,000 = - $50,000 Business “destroys” $50,000 of wealth of owner
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9 Chapter Nine The Profit Maximization Condition Assuming the firm sells output Q, its economic profit is: Where TR(Q) = Total revenue from selling the quantity Q TC(Q) = Total economic cost of producing the quantity Q ) ( ) ( Q TC Q TR - = π Q P Q TR × = ) (
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Chapter Nine The Profit Maximization Condition Since P is taken as given, firm chooses Q to maximize profit. Marginal Revenue: The rate which TR change with output. Since firm is a price taker, increase in TR
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This note was uploaded on 09/15/2011 for the course ECON 300 taught by Professor Zh during the Spring '11 term at SUNY Albany.

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ch09 - Chapter 9 Perfectly Competiti ve Markets Chapter...

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