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L14 - Perfect Competition - 10282013.pdf

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University of Toronto St. George
James Pesando

Supply Curve 1. Exists only in perfect competition 2. Reflects profit-maximizing behaviour You are an organic farmer (no pesticides) There is a sharp increase in the demand for organic foods. Question: 1. Will you earn (economics) profits? 2. Will these (economics) profits continue over the long run? Answers: 1) Yes 2) No (as other farmers switch to organic crops, until the economic profits are competed away) Insight For economic profits to persist over the long run, there must be obstacles (barriers to entry) that prevent new firms from entering and competing Organic Foods: A Perfectly Competitive Market What is a perfectly competitive market? 1. MANY buyers and sellers of an IDENTICAL product (so that actions of each buyer or seller do not influence market price) 2. Firms can enter or exit the industry (NO BARRIERS TO ENTRY or exit) Key Features 1. Each firm is a PRICE TAKER and faces a perfectly elastic demand curve at market price 2. The number of firms is fixed in the short run, but can vary in the long run D = market demand curve d = individual demand curve The price elasticity of demand faced by an individual coffee grower is closest to: a) 0.01 b) 0.10 c) 1.0 d) 10.0 e) 1,000 Total Revenue, Average Revenue, Marginal Revenue for Perfectly Competitive Firm: Example Q P TR AR MR (P * Q) (TR / Q) (ΔTR / Q) 1 6 6 6 6 2 6 12 6 6 3 6 18 6 6 4 6 24 6 6 5 6 30 6 6 MR is unchanged because of perfectly competitive demand curve Perfec
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