Lecture notes week 7

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University of Toronto Scarborough
Economics for Management Studies
Gordon Cleveland

Week 7 Perfect Competition Perfect Competition the main model for microeconomics N the firm in SR N the industry in SR N the firm in LR N the industry in LR N dynamics of SR & LR adjustments to a shockhow does equilibrium change in SR & LR N too much material to complete in one week, but included here because it is all oneel Perfect Competition 1. Many buyers, many sellers (price takers) 2. Homogeneous goodstandardized (no brand loyalty) 3. Free entry and exit (no barriers to competition) 4. Perfect information (consumers do not make mistakesalways find the lowest price) Typical cost situation facing perfectly competitive firm: Rising MC in SR because of diminishing marginal product of labour (note that TC = (PL L) + (PK K), so that dTCdL = P L Also, we can write the marginal product of labour as MP = dqdL [where q = f(K, L)]. L Therefore, the ratio LMP =L(dTCdL)(dqdL) or dTCdL dLdq = dTCdq In other words: MC = P LMP L) PL= price of labour MP = marginal product of labour L U-shaped AVC and AC curves AFC declining as output increases Look like diagram Simplified a bit Remember, cost curves (and cost functions) in economics include all opportunity costsincluding those that accountants dont count (a normal return on money invested in the firm, labour of family members and of the owner, etc.) PC (perfectly competitive) firm will try to maximize profit. It cant change its cost curves. It cant push up the price. It cant distinguish its product from others by advertisingmarketingproduct innovation. All it can do is choose the profit-maximizing output! ! = TR TC Max q! = d TR d q d TC d q = 0 i.e., MR MC = 0 or MR = MC i.e., choose the output at which MR = MC www.notesolution.com
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