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Econ 1 – ELEMENTS OF ECONOMICS LECTURE NOTES Foster, UCSD November 07 TOPIC 6 -- PERFECT COMPETITION A. Introduction to Industrial Organization and Market Structure 1. Industrial Organization: Definition The IO Paradigm 2. Dimensions of Structure/Conduct/Performance: a) Structure. 1) Number of buyers and sellers. Perfect competition Pure monopoly Oligopoly Monopsony (Oligopsony) Bilateral monopoly Monopolistic competition 2) Seller concentration. 3) Seller interdependence. 4) Product differentiation. 5) Barriers to entry and exit of firms (BE). Examples -- economies of scale, product differentiation, govt-imposed barriers, anticompetitive conduct ( e.g. , limit pricing and predatory pricing) Barriers to exit – specialized capital, LR contracts b) Conduct. 1) Mergers and takeovers. 2) Price fixing and other collusive behavior. 3) Pricing patterns (discrimination, markup policy). 4) Advertising & marketing strategies, R&D spending. c) Performance. 1) Efficiency, technological progressiveness and growth. 2) Political and business cycle effects. d) Public Policy: 1) Antitrust policy. 2) Public utility regulation. 3) Regulation of job safety, product quality, employment and promotion. 4) Govt ownership of firms. The Industrial Organization Paradigm Market Structure Firm Conduct Economic Performance Public Policy
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Ec 1 PERFECT COMPETITION p. 2 B. Perfect Competition in the Short Run 1. Market Structure and Assumptions: a) Many small buyers and sellers. No buyer or seller acting alone can affect P*. b) Other assumptions. 1) Low or no barriers to entry or exit. 2) No product differentiation. 3) No seller interdependence. 4) Perfect instantaneous information, no transactions costs. c) Notes on competition. Use in everyday language Abstract ideal, but some agricultural and resource markets come close We continue to assume that x d = x p = x s = x. 2. The Perfectly Competitive Firm: [Fig. 1] a) The firm is a price taker. 1) When the firm varies its rate of output between 0 and x max , it has no noticeable effect the market. Hence the firm accepts P* as a given constant beyond its control. 2) Implication -- the firm faces a horizontal (infinitely elastic) demand curve (d) for its own output -- it can sell as much or as little as it chooses at going price P*.
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