1 / 16

Perfect Competition

Perfect Competition. John R. Swinton, Ph.D. Center for Economic Education Georgia College & State University. Perfect Competition. Question: Suppose that roses are produced in a perfectly competitive, increasing-cost industry in long-run equilibrium with identical firms.

senona
Download Presentation

Perfect Competition

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Perfect Competition John R. Swinton, Ph.D. Center for Economic Education Georgia College & State University

  2. Perfect Competition • Question: • Suppose that roses are produced in a perfectly competitive, increasing-cost industry in long-run equilibrium with identical firms. • Draw correctly labeled side-by-side graphs for the rose industry and a typical firm and show each of the following: • Industry equilibrium price and quantity, labeled Pm and Qm, respectively. • The firm’s equilibrium price and quantity, label Pf and Qf, repectively.

  3. Perfect Competition • Assumptions: • Price Takers (buyers AND sellers) • Large Number of Sellers and Buyers • No Barriers to Entry • Identical Products • Complete Information • Profit-maximizing Behavior

  4. Perfect Competition • Individual Firm Decision: • Rule #1: Set Output such that MC=MR • MR = Market Price (because the firm is a price taker) • IF MR < min AVC then Shut Down! • IF MR > min AVC but < min ATC then Stay Open in the short run and Shut Down in the long run • IF MR ≥ Min ATC then Stay Open

  5. Perfect Competition • Graphically: Price good X MC ATC Min ATC 0 Quantity good X

  6. Perfect Competition • Graphically: Price good X Supply MC ATC Min ATC 0 Quantity good X Shut Down Produce

  7. Perfect Competition • Meanwhile, the Market: Price Roses Supply (or MC) Pm Demand (or MB) 0 Quantity Roses Qm

  8. Perfect Competition • Meanwhile, the Market: Price Roses Supply (or MC) Pm Demand (or MB) 0 Quantity Roses Qm

  9. Perfect Competition • Graphically: Price Roses MC ATC Pm=Pf=MR Min ATC 0 Quantity Roses Qf

  10. Perfect Competition • Assume there is an increase in demand for Roses. Price Roses Supply (or MC) New Pm Pm New Demand (or MB) Demand (or MB) 0 Quantity Roses Qm New Qm

  11. Perfect Competition • Short-run reaction: Price Roses MC New Pm=Pf ATC Pm=Pf=MR 0 Quantity Roses Qf New Qf

  12. Perfect Competition • Short-run reaction: Price Roses MC New Pm=Pf ATC Profits 0 Quantity Roses New Qf

  13. Perfect Competition • Long-run: • Profits attract entry of identical firms. Price Roses Supply (or MC) New Pm Pm New Demand (or MB) Entry 0 Quantity Roses New Long-run Qm New Qm

  14. Perfect Competition • Long-run reaction: • As firms enter the price returns to its original level Price Roses MC New Pm=Pf ATC Original Pm=Pf=MR 0 Quantity Roses Original Qf New Qf

  15. Perfect Competition • Results: • Number of firms will increase – because they were attracted by the profits created by the increase in demand. • Each firm’s ATC will remain exactly where it was before – nothing in the question impacts the cost of production. • Profit maximizing price will be exactly as it was in the original part – the firms that entered were exactly the same as the ones that were already in the industry so their ATC look the same. • Profits will be zero once again.

More Related