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Lecture 15 Perfect Competition

2. A market will produce an efficient resource allocation if all participants in the market have zero market power. market power: the degree to which a buyer or seller can influence the market's price.. zero market power means that relative to the marketan individual buyer's purchases are so small

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Lecture 15 Perfect Competition

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    1. 1 Lecture 15 Perfect Competition Some Things to Ponder Is it worth inquiring about things that likely will not happen? Is there value in examining an “ideal situation” that is an abstraction form reality? Since economics is the study of allocating resources among unlimited competing wants, under what conditions is the resource allocation optimal (i.e., efficient)?

    2. 2 A market will produce an efficient resource allocation if all participants in the market have zero market power zero market power means that relative to the market an individual buyer’s purchases are so small they do not influence the market price. an individual producer’s sales are so small they do not influence the market price.

    3. 3 A firm’s level of market power depends upon the characteristics of the industry it is in. Market power can be illustrated by the shape of the demand curve faced by the firm.

    4. 4 Perfect Competition: firms have zero market power Monopolistic Competition: firms have minimal market power Oligopoly: firms have significant market power. Monopoly: firm has virtually complete market power

    5. 5 Perfect Competition (PC) Industrial Organization Characterized by: large number of buyers and sellers in the market. firms have identical costs. firms produce a homogeneous output. perfect information about market prices and profits is available. entry into and exit from the industry is easy.

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    7. 7 Revenues for the perfectly competitive firm TR = AR = MR =

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    14. 14 EOP Assignment What is market power? Explain the circumstance under which a firm is a price taker. Explain the difference between SR and LR equilibrium in a perfectly competitive industry. Explain why production where P = MC is an optimal allocation of resources.

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