bec doms ppt on perfect competition
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Bec doms ppt on perfect competitionTRANSCRIPT
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Perfect Competition
What is it? Firm behavior Short run Long run
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Perfect Competition
many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage
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examples
wheat farming dry cleaning paper cups
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Firm Behavior
maximize profits TR > TC
economic profits
TR = TC normal profits
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Firm is price taker
cannot influence price take price as given, choose Q
firm demand is perfectly elastic horizontal line
MR = P firm sells all it wants at price, P
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Profit maximizing
firm chooses Q to max profits where TR - TC is largest
-- where MR = MC why MR = MC?
MR > MC
-- output adding to profit MR < MC
-- output taking away from profit
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Market for syrup (all firms)P
Q (cans/day)
D
S
$8
100
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Firm’s demand, cost curveP
Q (cans/day)
$8 D = MR = P
MC
10
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firm is price taker what if price too low to earn profit?
economic loss will firm exit?
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costs & exit
firm will stay, in SR, if P > AVC
why? if firm exits, loses TFC if P = AVC
-- loss from staying
= loss from exit
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SR equilibrium
two cases economic profit economic loss
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Case 1: economic profit
P = $8, Q = 10 ATC = $5 profit = ($8)(10) - ($5)(10) = $30
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P
Q (cans/day)
$8 D = MR = P
MC
10
ATC
$5
economicprofit
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case 2: economic loss
P = $3, Q = 7 ATC = $5 profit = ($3)(7) - ($5)(7) = - $14
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P
Q (cans/day)
$3 D = MR = P
MC
7
ATC
$5
economicloss
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12.3 LR Equilibrium
entry & exit of firms firms earn normal profit
economic profit will be zero
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why zero economic profit?
if economic profit > zero firms enter (S shifts right) price falls profit falls to zero
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P
Q (cans/day)
D
S
$8
100
S’
$5
120
market for syrup
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Syrup firmP
Q (cans/day)
D = MR = P
MC
ATC
$5
zeroeconomicprofit
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if economic profit < zero firms exit (S shifts left) price rises profit rises to zero
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P
Q (cans/day)
D
S
$5
120
market for syrup
$3
140
S’’
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P
Q (cans/day)
$3 D = MR = P
MC
7
ATC
$5
economicloss
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Syrup firmP
Q (cans/day)
D = MR = P
MC
ATC
$5
zeroeconomicprofit
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Shifts in market demand
change price in SR profits or losses
in LR affect exit/entry return to zero economic profit
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Summary
price takers MR = MC determines equilibrium Q
SR: economic profit or loss LR: economic profit is zero due
to entry/exit