Class Notes (839,559)
Economics (953)
Arvin Dar (12)
Lecture

# Topic 8 - Perfect Competition.docx

3 Pages
103 Views

Department
Economics
Course Code
Economics 1021A/B
Professor
Arvin Dar

This preview shows page 1. Sign up to view the full 3 pages of the document.
Description
Topic 8 – Perfect Competition 1. Introduction 2. Possible SR equilibria for a firm 3. SR S curve for a firm and for the industry 4. LR equilibrium for this market structure (for firms operating under it) 5. Question of efficiency 1. Introduction Conditions needed: 1. We have many sellers 2. We have very easy entry 3. We have a product that is homogenous (i.e. cannot be differentiated – gay couple) 4. We have perfect information (i.e. everybody is aware of everything going on – all know prices) 5. Costless transaction (at the minimum, the same cost transaction) (Cost A = Cost B [driving, etc.]) Industry/Market Firm (D = perf elastic)  Why does the firm act like a price taker? o Industry decides the price of a bushel of wheat. Suppose its \$10. The farmer decides to sell for \$11. Perfect information, everyone will know he’s selling at \$11. The buyers know everyone else is selling at \$10. Since it’s a homogeneous product with many sellers, people will buy somewhere else. o Farmer decides to sell wheat at \$9. Immediately everyone’s going to know that and rush to his farm, line up outside his farm to buy his wheat. Someone’s going to offer to buy it all for \$9 so he can resell it for \$10 and he’s going to have to turn other people away. o The price has to be the price the industry sets. o When there are many sellers, each individual seller is insignificant. 2. Possible SR equilibria for a firm  There are three possible short run equilibria for a firm operating under perfect competition. One where the firm makes positive profits, one where the firm makes zero profits, and one where the firm earns negative profits.  In the latter case, the firm may or may not shut down. \$P, MR, AC, MC MC AC MC AC P* P=D=AR=MR AC*  P ≥ AVC  MC = MR MC cuts MR from below Q* Q Q* If P > AC (AFC + AVC) then P > AVCP = TR and AVC = TVC AC/1 = TC/Q means TC = Q*AC AC AVC AC MC AVC Close. P won’t cover TVC, not to mention TFC  MC = MR  Cut MR
More Less

Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document

Unlock to view full version

Unlock Document
Me

OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.