To analyze the industry we need to determine n and p

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To analyze the industry we need to determine n and P Method for determining n and P involves 3 steps: (1) derive a relationship b/w n and AC of a typical firm o This relationship is upward sloping, more firms there are, the lower the output of each firm higher its cost per unit of output o Since all firms are symmetric, in equilibrium they all will charge the same price o When all charge the same price P = P Q = S/n o We know that AC depends on a firms output o Therefore AC = F/Q + c = n x F/s + c This equation tells us that the more firms there are in the industry the higher the AC since the more firms there are, the less each firm produces (2) Relationship b/w the number of firms and the price each firm charges, which must equal P in equilibrium o This relationship is downward sloping b/c the more firms there are, the more intense is competition among firms lower the prices they charge o MR = P – Q/(S x B) = c P = c + Q/(S x B) (if all firms sell at the same price then Q = S/n) P = c + 1/(b x n) o The more firms there are in the industry the lower the price each firm will charge o At P = AC zero profit
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(3) When the price exceeds AC additional firms will enter the industry, while when the price is less than AC firms will exit. Therefore in the LR the # of firms is determined by the intersection of the curve that relates AC to n and the curve that relates price to n Monopolistic Competition and Trade The Effects of Increased Market Size # of firms in a monopolistically competitive industry and the prices they charge are affected by the size of the market Larger markets will usually have more firms and more sales/firm; consumers in a large market will be offered both lower prices and a greater variety of products than consumers in small markets the AC/firm is higher the more firms there are in the industry CC curve: AC = F/Q + c = n x F/S + c An increase in total sales S will reduce AC for any given number of firms n because when the market grows while n is held constant, sales/firm will increase and the AC of each firm will therefore decrease Therefore when comparing two markets the one with the higher S will have the CC curve will be below the smaller market figure shows the effect of an increase in the size of the market on LR equilibrium an increase in the size of the market measured by industry sales, S shifts the CC curve down from CC 1 to CC 2 this has no effect on the PP curve this also causes the number of firms to increase, while the price falls therefore: consumers prefer to be part of a large market rather than a small one; lower price and greater variety Economies of scale and comparative advantage a situation to think about how economies of scale interact with comparative advantage to determined the pattern of international trade Two counties: home and foreign Two factors of production: capital and labour, home: higher capital-labour ratio capital abundant , Two industries: cloth and food (cloth = capital intensive)
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