E251x.F11.W08.2-09.Competition

E251x.F11.W08.2-09.Competition - ECON 251x Week 08.2 -09...

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ECON 251x ECON 251x Week 08.2 -09 The Firm in Competition (Chapter 8, 9)
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Demand Facing the Firm $P $P $P $P Q Q Q Q D 1 D 2 D 3 D 4 Increasing degrees of Competition Increasing degrees of Market Power
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Alternative Economic Models $P $P $P $P Q Q Q Q D 1 D 2 D 3 D 4 Monopoly Oligopoly Monopolistic Competition Perfect Competition (Price Taker) Increasing degrees of Competition Increasing degrees of Market Power
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Alternative Market Structures The Most Competitive Case: The Price Taker Firm
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Assumptions for a Price Taker Large number of buyers & sellers Homogeneous products Low information costs to buyers & sellers Low costs of entry and exit of firms
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Market and Firm Demand $P Q/T Pe Qe $P Q/T Pe Market Firm D D D S S
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Price Taker Firm $ P Q/T P e D = MR MC MC Q e Profit Maximizing Rate of output Price = Marginal Price = Marginal Revenue Revenue
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Total Revenue = P e x Q e $ P Q/T P e D MC MC Q e Total Revenue Total Revenue
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$ P Q/T P e D MC Q e AC Total Cost = AC x Q AC at Qe Total Cost Total Cost
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Profit = TR - TC $ P Q/T Pe D MC Q AC
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$ P Q/T P e D = MR MC Q e AC Profits occur if (P=MC) > AC
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Market Response to Profits $P Qx/T Pe Qe D D So So S’ P’ Q’
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Price Taker Firm: Zero Profits $ P Q/T P e D’ = MR MC MC Q e ATC D
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Price Taker Firm: Loss $ P Q/T P e D = MR MC MC Q e ATC Loss
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Price Taker Firm: Loss Shutdown? $ P Q/T P e D = MR MC MC Q e ATC Loss AVC TVC Stay in Business SR
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Price Taker Firm: Loss Shutdown? $ P Q/T P e D = MR MC MC Q e ATC Loss AVC TVC ShutDown in SR
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Market Response to Losses $P Qx/T P’ Q’ D D S’ S’ So P o Q o
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Price Taker Firm: Zero Profits $ P Q/T P e D’ = MR MC MC Q e ATC D P o
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Price Taker Firm: Short Run Supply $ P Q/T P e D = MR MC MC Q e ATC AVC TVC ShutDown in SR Short-Run Supply
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Pork & Swine Flu Association: ↓Demand →(↓ Price Falls) Industry lobbies: Δ Name to H1N1 virus China prohibits imports from US ↓Demand Existing firms make losses (1/6 of industry) Firms leave industry → (↓ Supply) →↑Price
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Implications of Price-Taker Industry Demand for the firm is horizontal at the market price Efficiency: Price equals marginal cost of production Competition drives price to equal Average cost Economic profits only exist in the short-run.
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Long-Run Industry Equilibrium Long-Run Industry Equilibrium $P Q/T Pe Qe $P Q/T Pe Market Firm D D D S S MC ATC Qe
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ECON 251x Using the Competitive Model Chapter 09
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