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Perfect Competition - PowerPoint PPT Presentation


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Perfect Competition. Costs. and. Unit 3 – Theory of the Firm. Part 2. In the previous lecture we learned about the economic model of …. Perfect Competition. 1. Many buyers and sellers. 2. All the products are homogeneous. 3. All buyers & sellers are price takers.

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Perfect Competition


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slide1

Perfect Competition

Costs

and

Unit 3 – Theory of the Firm

Part 2

slide2

In the previous lecture we learned about the economic model of …..

Perfect Competition

1. Many buyers and sellers

2. All the products are homogeneous.

3. All buyers & sellers are price takers.

4. There are NO barriers to entry.

5. There is perfect information.

6. Firms cannot earn economic profits in the long run.

2 of 9

slide3

cost

P

firm

S

industry

P

p

MR=D=AR=P

D

Q

Q

quantity

How do we label the demand curve for the individual firm?

What does each of these abbreviations stand for?

Briefly, why is each equal to the other?

slide4

cost

P

firm

S

industry

MC

P

p

MR=D=AR=P

D

Q

Q

q

quantity

How does the individual firm determine where it will produce?

A firm maximizes profits where MC = MR

How does this relate to “making decisions on the margin?”

slide5

cost

P

firm

S

industry

MC

P

p

MR=D=AR=P

D

Q

Q

q

quantity

Where MC = MR is the point ofallocative or economic efficiencyfor our economy.

when resources are distributed in a way to maximize utility; here the cost of the next one is equal to the price (value) of the next one (P = MC); both the firm and the consumer are getting the max that they can

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slide6

cost

P

firm

market

ATC

MC

S

AVC

MR=D=AR=P

p

P

some AFC covered

D

AVC covered

Q

Q

q

quantity

MC = MR

Where will this firm produce?

Is this firm making an economic profit?

No

Should this firm shut down?

No

Why not?

B/c at point q it is covering all of its AVC and some of its sunk costs (AFC)

slide7

cost

P

firm

market

ATC

MC

S

AVC

MR=D=AR=P

p

P

p2

D

Q

Q

quantity

Price must fall to what level for the firm to shutdown?

shutdown point where MC = MR = AVC

slide8

cost

firm

P

market

MC

ATC

S

AVC

MR=D=AR=P

p

P

D

Q

Q

q

quantity

Is the above firm making a profit?

It is making a normal profit b/c a normal profit is figured into the cost of doing business; but it is not making an economic profit; it is at equilibrium output & price

slide9

cost

firm

P

market

MC

ATC

S

AVC

MR=D=AR=P

p

P

D

Q

Q

q

quantity

The above firm is producing at productive (or technical) efficiency…..

where it is operating at its minimum ATC

here it is producing goods for society at the very lowest cost of resources for society

explain why

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