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Ch14 lecture notes.odt

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David Gray

Chapter 14 notes A difference in economic behavior? -Rogers has a monopoly in the market for cable television, while it faces competition in the market for internet and cell phones.Thus Rogers is reasonable and offers feasible prices in the market for internet and cell phones(Rogers maintains this economic behaviour to stay competitive market) Market Structure: provides the final component that is needed to derive the S curve: the rules of the game for buying/selling, AFTER production has taken place. -It places constraints on the pricing behavior of firms. The pricing behavior of a competitive market is very different to the pricing behavior of a Monopoly market. -Up until now, we still do NOT know which P and Q the firm will select. The 4 assumptions/ characteristics used to build the model of perfect competition -Free Entry into the industry (no significant barriers to entry)(THIS ASSUMPTION ONLY COMES INTO PLAY IN THE LONG-RUN) -Perfect information regarding prices and quality. Every supplier knows the prices and quality of products in the market, -Homogenous product provided by all suppliers -Many buyers and Sellers There is no such thing as a perfectly competitive market There are some markets that resemble it, Examples Include: Stock Market, Banking, sevices, fast food, retail grocery. Reminder that TR= P*Q MR= marginal revenue= increment to TR obtained by selling one more unit of output MR= Change in TR/Change in Q Is the slope of the TR function Average Revenue= TR/Q = P*Q/Q = Price of the good (P) -Revenue per unit sold Average revenue in most cases is equal to P refer to figure 14.3 Critical Result In perfectly competitive markets, P= MR always -That is not true in monopolized markets Interpretation: If the firm sells one more(less) unit of output,TR increases(decreases) by P. Price Taker Result So where does the firm's price come from? The price that the firm charges for its product is dictated by the market -We say that the firm is a PRICE TAKER -It can only charge that price, if a firm were to charge more than the price which was dictated by the market, it would lose consumers. A firm cannot state it has higher quality product because in a perfectly competitive market all products are homogenous. -There are many sellers, so customers can go to other suppliers -The market is homogenous product, everyone offers the same quality in their products -Perfect information, so everyone knows what the going and quality is. Another way of saying this that a firm cannot alter the market price, even if it changes its output level. Compare this to a monopoly firm where the firm can decrease the market price by increasing output drastically and flooding the market. -*The market for crude oil is very competitive. Geometrically, it implies that the Demand Curve facing the individual firm in a perfectly competitive market is horizontal at the going market price. -It is infinitely elastic ***In a perfectly competitive market, each individual firm has its own demand curve.The overall demand curve for the market is inelastic and steep. Market Demand curve- Downward sloping,(like any demand curve) Individual Demand Curve- Perfectly elastic, horizontal PROFIT MAXIMIZATION We already assumed that a firm is guided by profit maximizing behaviour. *Remember that microeconomics is all about the P's and Q's We already know the price of the firm, but we do not know the quantity it will produce. The derivative of the Total Revenue is marginal revenue, the derivative of the Total Cost is the marginal cost. You can maximize the profit by equaling those derivatives to one another. This ends up occurring when the output level results in (TC-TR) is the highest OR when MC=MR -The firm ends up incurring no changes in profit on the last unit of production that it produces and sells. If you observe a firm producing at a level where MR does not equal MC, then you can only conclude that it is not can only conclude that it is not making as much profit as possible. -**It does not mean that the firm is making a loss If MR>MC, more should be produced If MR Average Total Cost profit is positive.(Remember this is per-unit profit.) IF PTC in other words when P>AVC the total revenues must cover the variable costs of operating. IF all variable costs are covered and some fixed costs are covered the firm should continute to operate in the
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