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101chapter7 - Chapter 7 Perfect Competition What is it Firm...

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Chapter 7. Perfect Competition Chapter 7. Perfect Competition What is it? Firm behavior Short run Long run
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Perfect Competition Perfect Competition many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage
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examples examples wheat farming dry cleaning paper cups
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Firm Behavior Firm Behavior maximize profits TR > TC economic profits TR = TC normal profits
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Firm is price taker Firm is price taker cannot influence price take price as given, choose Q firm demand is perfectly elastic horizontal line MR = P firm sells all it wants at price, P
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Profit maximizing Profit maximizing firm chooses Q to max profits where TR - TC is largest -- where MR = MC why MR = MC? MR > MC -- output adding to profit MR < MC -- output taking away from profit
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Market for syrup (all firms) Market for syrup (all firms) P Q (cans/day) D S $8 100
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Firm’s demand, cost curve Firm’s demand, cost curve P Q (cans/day) $8 D = MR = P MC 10
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