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Ch. 23: Pure Competition

Ch. 23: Pure Competition

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Ch. 23: Pure Competition

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  1. Ch. 23: Pure Competition • Characteristics & Occurrence • Presence of a large number of independently acting sellers • Firms produce a standardized product. Therefore, as long as the price is the same, consumers are indifferent about which seller to buy from • Individual firms have NO control over product price = “price taker” • New firms can freely enter and existing firms can freely exit the industry Prof. Ana Corrales ECO 2023 Notes

  2. Demand as Seen by a Purely Competitive Seller • The demand curve of the competitive firm is perfectly elastic (Ed = ∞) • Because the purely competitive seller is a “price taker”, the going market price (P) is the demand curve (D) for that good or service • The market price is given • The Demand & Revenue Schedules for a Purely Competitive Firm (Table 23.2, Fig 23.1) • Because a purely competitive firm can sell additional units of output at the market price, its MR curve coincides with its perfectly elastic demand curve • In pure competition, P = MR • Marginal Revenue = change in total revenue (extra revenue) resulting from selling one more unit of output Prof. Ana Corrales ECO 2023 Notes

  3. Marginal Cost & Short-Run Supply • The segment of the firm’s MC curve that lies above the AVC curve is its SR supply curve (Fig 23.6) • The horizontal sum of all the firms’ individual supply curves determines the industry supply curve (Fig 23.7) Prof. Ana Corrales ECO 2023 Notes

  4. Pure Competition and Efficiency • The final L-R equilibrium position of all firms will have the same characteristics relating to economic efficiency • Price will settle where it is equal to the minimum ATC • Since the MC curve intersects the ATC curve at its minimum point, MC = minimum ATC • Fig 23.12 Prof. Ana Corrales ECO 2023 Notes

  5. Ch. 23 Study Questions • 1 • 3 (complete Table + b) Prof. Ana Corrales ECO 2023 Notes