# The Model of Perfect Competition II

Document Sample

```					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
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
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

```
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
 views: 2 posted: 3/3/2012 language: pages: 10
How are you planning on using Docstoc?