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Agricultural Economics
AGEC 200
Anwar Naseem

Competitive Markets Clicker Q: Perfectly Competitive Firms sell products that are Identical (exactly the same) - Similar are cell phones. They have similar features but not identical Q2: Perfectly competitive firm to raise its price above market price, would sell nothing. Closest thing to PCM is potato farmer, but very rare to find perfectly competitive markets. Want to know “if they existed” how would they behave Assumptions for Perfectly Competitive Markets 1. All firms sell homogenous product 2. Customers know product and each firm’s price  they have good knowledge Output Cost Not a huge difference if such a small firm 3. Each firm reaches its minimum LRAC at a level of output that is small relative to industry’s total output 4. Firms are free to exit and enter industry Competitive market Demand Curve - (Competition (like pepsi vs coke) and Competitive market is not equal) - Difference between industry demand curve and command curve that one firm faces - The demand curve for a firm is going to be perfectly elastic Relationship between TR, TC, MR, MC - Look at notebook! Supply Curve of a firm - MC curve IS the firm’s supply curve - As you raise price, firm starts to increase output  since can make more money b/c MR > MC o Because every time raise price, then firm will increase output - *Industry’s supply curve would be taking every firm’s supply curve (MC) and adding it all up Decisions of Firm - Shutdown: short-term decision to not produce anything b/c of market conditions. Still pays FC o Seasonal: in wintertime, not worth icecream bar to open b/c not enough R to cover C - Exit: long run decision to leave market  don’t need to pay FC anymore Firm’s shortrun decision to shut down - If shuts down temporarily o Revenue falls by TR o Costs fall by VC  ie in restaurants, ingredients, staff - So firm shut down if TR < VC - Divide both sides by Q: TR/Q < VC/Q = P < AVC - Therefore shut down if P < AVC The Competitive Firm’s SR supply curve - Price is below AVC, Q = 0 because won’t get anything back - When above, supply curve is
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