ch9 - Chapter 9 Competitive markets OUTLINE Perfect...

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Chapter 9 – Competitive markets OUTLINE Perfect competition Marginal and Average revenue Profit maximization for competitive firms Short-run competitive equilibrium Long-run competitive equilibrium o Example 9.1: Profit maximization and LR competitive equilibrium o Increase in demand in a constant cost industry o Decrease in demand in a constant cost industry o Exercise 9.3 : Adjustment to long-run equilibrium Perfect competition Basic assumptions 1. Homogeneous (i.e. identical) products. 2. Buyers know prices charged by each firm. 3. MES is small relative to market size. 4. Freedom of entry and exit in long-run. Results : Assumptions 1-3 imply that each firm… …acts as price-taker which implies that they… …have no influence on price …face a horizontal demand curve even though market demand is downward sloping. Maria Gallego EC120 – Ragan and Lipsey --Chapter 9 – Competitive markets page 1 of 14
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Perfect competition Draw the firm demand curve which corresponds to the demand and supply diagram P q P Q S D Firm Industry Maria Gallego EC120 – Ragan and Lipsey --Chapter 9 – Competitive markets page 2 of 14
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Total revenue (TR) q P TR × = Average revenue P q q P q TR AR = × = = …is the revenue earned from the typical unit if all units sell at the same price then AR = P. Marginal revenue q TR MR = …is the added revenue from each additional unit P q q P q ] q P [ q TR MR = × = × = = if all units sell at the same price th then demand is horizontal MR = P Draw the firm’s MR, AR and TR curve which correspond to the
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ch9 - Chapter 9 Competitive markets OUTLINE Perfect...

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