Perfect Competition. Assumptions of Perfect Competition. Homogeneous or identical products – every seller’s product is the same as every other seller’s product. Many small independent firms Easy entry & exit into the industry – all resources are perfectly mobile.
Une image / un lien ci-dessous est fourni (tel quel) pour télécharger la présentation
Politique de téléchargement : le contenu du site vous est fourni TEL QUEL pour votre information et votre usage personnel ; il ne peut être vendu, concédé sous licence ni partagé sur d’autres sites sans l’accord de son auteur.Le contenu vous est fourni TEL QUEL, pour votre information et votre usage personnel uniquement.Téléchargez la présentation en cliquant sur ce lien.Lors du téléchargement, si vous ne parvenez pas à télécharger une présentation, l’éditeur a peut-être supprimé le fichier de son serveur.Pendant le téléchargement, si vous ne parvenez pas à obtenir une présentation, le fichier a peut-être été supprimé par l’éditeur.
Assumptions of Perfect Competition • Homogeneous or identical products – every seller’s product is the same as every other seller’s product. • Many small independent firms • Easy entry & exit into the industry – all resources are perfectly mobile. • Firms, consumers, & resource owners have perfect knowledge of relevant economic & technical data.
The perfectly competitive firm is a price taker that sells its product at the market price. Why? • If the firm tried to charge more than the market price, it would lose all its business to its competitors who sell the identical product. • The firm can sell as much as it wants at the market price, since it is very small relative to the market. The firm, therefore, has no incentive to charge less than the market price.
Then the firm will have an economic loss. • However, the firm will still operate. • If the firm were to shut down & produce nothing, its loss would equal its fixed cost. • But since the price is greater than the variable costs per unit (AVC), by operating the firm will be able to cover its variable costs & part of its fixed costs. • So its loss would be smaller than the amount of fixed cost. • So it pays to operate, as long as the price is above the minimum of the average variable cost.
Mathematically, the situation works like this: • P > AVC • So, PQ > AVC (Q), • [Now since AVC = TVC / Q , • AVC (Q) = TVC.] • So, PQ > TVC • TR > TVC • TR – TC > TVC – TC • > TVC – TC • > – TC + TVC • > -1(TC – TVC) • > – TFC If the firm produced nothing, = TR – TC = TR – (TVC+TFC ) = 0 – (0+TFC) = – TFC So the firm does better by operating than by shutting down.
However, if the price is below the minimum of the AVC curve, • the firm is unable to cover even the variable costs, & it should shut down. • It would lose more by operating than by shutting down. • Consequently, the minimum of the AVC curve is called the shutdown point.
Positive economic profits • Break even • Operate at a loss • Lose same amount if operate or shutdown • Shutdown So we have these five possible cases: MC ATC $ AVC P1 P2 P3 P4 P5 Quantity
S2 S3 S4 S5 S1 To determine the industry or market short run supply curve, horizontal sum the individual firms’ supply curves. Price Industry supply curve Quantity
S2 S3 S4 S5 S1 That means that for each price, we add the amounts all the firms are willing to supply. For example, if there are five firms who at a price of $25 will supply 10, 20, 30, 40, & 50 units each, the total supplied by the industry at that price is 10 + 20 + 30 + 40 + 50 = 150 . Price Industry supply curve 25 10 20 30 40 50150 Quantity
The Long Run Supply Curve • The initial market point and the final one are long run equilibrium points and therefore are on the long run supply curve for this industry. • (The middle point - the black one - is not on the long run supply curve, since it is not a long run equilibrium point.) • For a constant cost industry, the long run supply curve is a horizontal line.
