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Perfect Competition

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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  1. Perfect Competition Costs and Unit 3 – Theory of the Firm Part 2

  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. 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

  3. 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?

  4. 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?”

  5. 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 5 of 9

  6. 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)

  7. 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

  8. 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

  9. 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 9 of 9

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