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E251x.F11.W08.2-09.Comp.Clsnts

E251x.F11.W08.2-09.Comp.Clsnts - ECON 251x Fall 2011 Week...

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ECON 251x: Fall 2011 Week 08.2 -09 Classnotes: October 12-20, 2011 Competitive Markets (Ch. 8 & 9) Review: 1. Cost relationships at alternative rates of output: A. Marginal costs decline due to teamwork and specialization then rise due to diminishing marginal returns. B. Average Costs decline in the range of economies of scale due to teamwork and specialization and the spreading of fixed costs. Average costs rise in the range of Diseconomies of Scale as the marginal cost rises above the average cost. C. Marginal costs intersect average costs at the minimum of average costs. New: 1. The Demand facing the individual Firm : The degree of competition facing the firm is reflected by the elasticity of demand. The more close substitutes (D 1 – D 4 ) the more elastic the demand facing the firm and the less the market power of the firm. P P P P D 1 D 2 D 3 D 4 Q Q Q Q Monopoly Oligopoly Monopolistic Comp. Perfect Competition 2. Firms in the MOST competitive market (D4) are called price-takers and have no market power. 3. Assumptions that generate a price taker situation : A. Large number of buyers and sellers B. Homogeneous products (identical from the buyers point of view) C. Low information costs to buyers and sellers (all can observe what the market price is) D. Low cost of firms entering or leaving the market 4. A firm is a price taker when his/her output is so small relative to the market that changes in output have no discernable effect on the market price. 5. The demand facing the price taker firm is horizontal at the existing market price. 6. Market Demand & Supply Determine price. The Firm takes the price as given. Market $ Price Qty / T $ Price Qty / T Firm D S Pe Qe D = MR q MC Pe
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7. Since the price is constant for every quantity, the Price = Marginal Revenue. P = MR. 8. The profit maximizing output is the quantity where Marginal Revenue = Marginal Cost so Price = Marginal Cost. Profit maximizing Rule : MR = MC 9. If the price is above average cost the firm earns economic profits.
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