Notes on Perfect Competition

Notes on Perfect Competition - Shomu Banerjee ECON 101...

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ECON 101 Notes on Perfect Competition (PC) — 1 AGENDA • Assumptions • A PC firm’s output decision in the short run • Calculating profits graphically • A PC firm’s shutdown decision Perfect competition is the first market structure we will study in detail. In reading the underlying assumptions below, think of the market for a particular kind of agricultural product, say soy beans. A.1 There are a large number of consumers; no single buyer can influence the market price through their individual buying decision because any buyer’s qty. demanded is a small fraction of what is traded on the market A.2 There are a large number of producers; no single firm can influence the market price through their individual production decision because each firm’s production is a small fraction of what is produced by everyone A.3 All producers produce the same good; there is no quality variation A.4 The best production technology is widely known; no patents or proprietary technology is needed A.5 There is perfect information: the market is ‘frictionless’, i.e., everyone knows exactly who is charging how much, and any changes (in demand, in the number of firms etc.) are known to everyone instantly and costlessly A.6 There is free entry and exit: new firms can either enter this industry and existing firms can leave this industry From A.2, a PC firm’s total output is a small fraction of what is produced by the industry, it can sell as much as it likes at the current market price (upto the firm’s production capacity). It therefore takes the market price as given in making its production decision. The reason for this is that if it tries to charge a higher price, no one will buy from him; if it charges a lower price, it will not attract any additional customers. Therefore a PC firm’s problem is to figure out how much to produce . Sometimes A.4 is included as a part of A.5, i.e., the perfect information assumption includes that
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This note was uploaded on 10/20/2011 for the course ECON 101 taught by Professor Dezhbakhsh during the Fall '07 term at Emory.

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Notes on Perfect Competition - Shomu Banerjee ECON 101...

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