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slide 1
PERFECT COMPETITION
Market Structure is
Important for Two Reasons
Monopoly
Few
Oligopoly
Many
Perfect
Competition
7.2
Supply
Demand
$25
8
12
Pairs of Shoes
16
7.3
Price
Supply
Demand
$25
8
12
Pairs of Shoes
16
PERFECT COMPETITION
7.4
Firm Behavior
Each firm is a price taker (MR = P).
Each firm sets its QF such that P = MC.
In long-run equilibrium,
price is bid down until:
P = MR = MC = ACMIN
Revenue
& Cost
per unit
MC
AC
P = $8
P = $6
QF
QF
Output
Perfect Competition:
Industry Outcome
7.5
$8
Supply Curve
after Entry
$6
$4
|
200 240
|
280 300
7.6
A DAY-CARE EXAMPLE
7.7
Yes
Consumer Surplus
$20 per Week
8 -
Couples
Maximum
Value
Consumer Surplus
$20
per Week
Producer
Profit
$40 perProfit
Week
Producer
P = $6 -
4 -
Grannys
Cost
2 0
0
10
12
7.8
A COMPETITIVE
DAY-CARE MARKET
Regional
Day-Care
Demand
MB
8 6 -
Grandmothers
4 -
Day-Care
Supply
MC
$2.50
2 - Store-Bought Day Care
0
10
12
14
QC = 9.5
7.9
US Demand
US Supply
$15
DWL
World Price
$12.50
US Imports
15
20
25
US Supply
$15
$14
$12.50
DWL
DWL
Imports
18
22
World Price
under Free Trade