Exam 3 ECON 2306 - 001
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Date Created: 10/30/15
10 1 315 Econ 2306 Midterm 3 Perfect competition Chapter 9 We Will start off by assuming firms are competitive Assumptions The good is same identical Homogeneous products Many Identical firms Perfect Knowledge No entry or exit in the shortrun Entry and exits is free in the longrun Implication No Strategic Behavior Each firm s choice of output has no effect on the market as a Whole Each firm ignores the actions of rival firms PC and Reality Commodity markets ex Wheat farmer Data Most firms are small 1020 15 Price taking If the firm Increase price no one buys from firm Reduces price firm loses money Implication Price is set by market firms are price takers Firms only choose how much to produce Demand curve price takers face a horizontal demand curve at market price P graph Marginal Revenue MR the additional revenue earned from an additional unit of output sold MR TR Q Average Revenue AR the average generated from each unit of output sold AR TRQ Demand Curve revisited Marginal revenue is re ected on the price graph Profit Maximization Profit total revenue total costs TR TC Profit Max Condition Profit is maximized When output q is chosen such that MR MC Profit Maximization chap 91 modeling how a competitive firm maximizes profits When firms have no fixed costs Profit Max FC 0 Step 1 Choose q such that MR MC graph Step 2 Find TR Step 3 Find TC Economic Rent The amount above What is necessary to put resources or inputs to use Example Producer surplus Producer surplus PS the amount left over after covering operating costs PSTR VC Producer surplus suppose MC is upward sloping Step 1 Choose q such that MR MC Step 2 Step 3 PS TRVC find variable costs Step 4 Find producer surplus Profit Rent Profit TR TC Rent TR TC Profit Max FCgt0 If a firm has fixed costs then ATC AVC Step 1 Choose q such that MR MC Step 2 Find variable cost PS TRTC Step 3 Find TC Observation In this particular example the firm makes no profit because TR TC 102215 When p is at the minimum ATC curve the firm is winning no profits and there is not a breaking curve Breaking even point When the price is at a minimum of AVC curve Shut down point firm to stop producing Seize production Perfect Competition 1 When P lt min AVC Firm produces zero when price falls below the shutdown point 2 When P gt min AVC Firm produces a quantity determined by P MC when price above shutdown point In general Firm s supply curve is its marginal cost Market supply curve The sum of all K indiVidual firms Smarket MCl MC2 MCk 1Short Run Profit Max No entry Firm Takes market price P and maximized profit Firm find q by setting MR MC TRTC 2Long Run Profit Max Entry is free Profit attracts firms Supply curve shifts right Price falls until P min ATC Profit is zero Application 0 Television 0 House ipping 0 Multilevel marketing Profitable industries With low barriers to entry ch 10 Market Equilibrium solving Perfectly Competitive Market Equilibrium 102715 Efficiency when MC MV the sum of consumer surplus and producer surplus is maximized Because the last Misconception oil took millions of years of form and could not be replaced in the span of a few generations Solving for an equilibrium Suppose the equations for demand and supply for economics textbooks is given by What is the equilibrium price and quantity Ch 10 2 How do changes in S ampD impact equilibrium Shifts in Supply and Demand 1 Increase in demand What happens With an increase in demand hula hoop Video Increase in demand Net effect P Q 2 Decrease in Demand Net effect P Q Causes Reduction in marginal costs Increase in the number of suppliers firms EX Technological change Increase in supply Decrease in supply causes Increase in marginal costs Decrease in the of suppliers EX restrictions on medical providers Ch10 Simult Shifts in supply and demand taxes Quantity increase both times rightward shift in the quantity and demand Scenario A Scenario B 102915 Combining the effects Demand increasing P Q Work in the same direction Supply increasing P Q Taxes Ch 104 The impact of taxing goods Government considers a tax Suppose 10000 units traded in the market 1 per unit tax imposed on production 1Per unit tax on producers a TaX s effect on price bTaX s effect on Welfare big graph Tax s Effect on welfare Consumer surplus Total value Total expenditure Producer surplus total revenue variable cost CS as fallen and PS has fallen on graph C Tax s effect on Revenue Producer collects tax and remits it to government Tax revenue is not simply 1 x Q Revenue less than expected because Q falls d Tax incidence e Tax s effect on Efficiency 2Per unit tax on consumers Quotas ch 105 The market for Consider Quota Imposed Government imposes a quota to help farm Reduce output and drives up P Social Wlefare PSCS Quota PS increases and CS falls Quota Rent Control Ch678 the impact of controlling price on apartments Video Consider Rent control Imposed Government imposes a price ceiling P to lower the price for renters price has fallen
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