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The Model of Perfect Competition II

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					The Model of Perfect
Competition - Part III




Microeconomics - Dr. D. Foster
Perfect Competition - An Ideal
 Firms are primarily distinguished from each other by
 the degree of competition they face:

  Perfect     Monopolistic
Competition                  Oligopoly   Monopoly
              Competition

Profit maximization.
The Model of Perfect Competition.
Allocative and Productive efficiencies.
SR & LR adjustments to changes in costs.
The paradox of taxing economic profits & other stories.
Long-run costs and long-run supply.
     Efficiency
Allocative Efficiency (What to produce?)
  occurs when Price = Marginal Cost
                 Why ?
Productive Efficiency (How to produce?)
   occurs where output level is at the
            minimum ATC
                 Why ?
        Perfect Competition
            & Efficiency
   Perfectly competitive
  firms always charge a             $                MC
                                                          ATC
     price = MC. Why?
                                   Pe                 MR = d
    In the LR, perfectly
 competitive firms produce
                                                          q
   at min. ATC. Why?                          q*

Perfectly competitive firms are always Allocatively Efficient

In the LR, perfectly competitive firms are Productively Efficient
 Perfect Competition in LR
 We know that in SR, firms can earn a positive,
   or negative, economic profit.
 What happens in the long run?
 P                                       P                  S*
                   S     If econ profits                         S
                   S*     are positive,
                             entry occurs
Pe                                            Pe
                            If econ profits
                    D        are negative,                       D
                               exit occurs
                        Q                                            Q
           Qe                                          Qe
       The Market                                  The Market
 Perfect Competition in LR
 If a firm earns positive economic profit, in the
 long run that will be dissipated as firms enter.

 P                             $
                    S                           MC
                    S*                                ATC

Pe                            Pe                    MR = d
                             Pe*                    MR* = d*
                    D
                                                            In the LR,
                         Q                             q     this firm
           Qe                         q* qe                  earns 0
                                                           econ profit.
       The Market                      A Firm
 Perfect Competition in LR
 If a firm earns negative economic profit, in the
 long run that will be eliminated as firms exit.

 P              S*              $                            ATC
                     S                         MC

                             Pe*                    MR* = d*
Pe                             Pe                   MR = d


                     D
                                                              In the LR,
                         Q                            q        this firm
           Qe                            qe q*                 earns 0
                                                             econ profit.
       The Market                     A Firm
The Paradox of Taxing
   Economic Profit
 With the tax, economic profit = 0 …
 In the short run, there are no consequences!
 P                         $   tax =
                S                          MC     ATC
P*                                               MR* = d*
Pe                                             Pe = MR = d
                   D*
               D
                    Q                             q
         Qe                            qe q*
              The Market                       A Firm
The Paradox of Taxing
   Economic Profit
In the short run, there are no consequences!
        But, what about the long run?

    Firms no longer earn an economic profit.
       No firms will enter into this market.
  The price will not fall; the output will not rise.
The Model of Perfect
Competition - Part III




Microeconomics - Dr. D. Foster

				
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