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Chap 014
Chap 014
Chap 014
McGraw-Hill/Irwin
Main Topics
What makes a market competitive? Market demand and market supply Short-run and long-run competitive equilibrium Efficiency of perfectly competitive markets Measuring surplus using market demand and supply curves
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Consumers have many options and buy from the firm that offers the lowest price Each firm takes the market price as given and can focus on how much it wants to sell at that price Few markets are perfectly competitive
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Market supply of a product is the sum of the supply of all the individual sellers
Graphically this is the horizontal sum of the individual supply curves Very similar to the procedure for constructing market demand curves
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Long-run supply curve is found by summing supply curves of all potential suppliers Free entry in a market implies that anyone who wishes to start a firm has access to the same technology and entry is unrestricted With free entry, the number of potential firms in a market is unlimited Long-run market supply curve is a horizontal line at ACmin
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Sample Problem 1 (14.3): The daily cost of producing pizza in New Haven is C(Q) = 4Q + (Q2/40); the marginal cost is MC = 4 + (Q/20). What is the market supply function if there are 10 firms making pizza? If 20 firms are making pizza? What is the market supply curve under free entry?
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B
A P* = ACmin = 100 C ^
S D
D
2000 4000
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In long-run:
Firms enter market Market equilibrium shifts, price falls and quantity rises
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In general, though, when demand for a product increases, prices of inputs used to make it may change This is a general equilibrium effect; the market we are studying and the market for its inputs must all be in equilibrium Taking the input price effect into account in the analysis of the market response to an increase in demand changes the result
Price of the good rises in the long run
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^ AC
B
A
min=110
E
C
ACmin=100
S S
D
^
D
2000 4000
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Aggregate surplus equals consumers total willingness to pay for a good less firms total avoidable cost of production Total benefits from consumption equal to willingness to pay
Area under consumers demand curve up to that quantity
Total avoidable costs of production include all of a firms costs other than sunk costs
Area under its supply curve up to its production level
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If we take the good from someone who purchased it and give it to someone who didnt, aggregate surplus must fall
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Begin from the competitive equilibrium Reduce sales of Producer A by one unit, increase sales of Producer B by one unit
Cost of producing any unit of output that a firm chooses to sell must be less than the equilibrium price Cost of producing any unit of output that a firm chooses not to sell must exceed the equilibrium price
Any shift in production from one firm to another must raise the total cost of production and lower aggregate surplus
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Measure producers total avoidable costs for the units they produce by the area under the market supply curve up to that quantity
When all producers face the same market price
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Aggregate Surplus
Can use market supply and demand curves to measure aggregate surplus Consumers total willingness to pay is area under market demand curve up to the quantity consumed Producers total avoidable cost is the area under the market supply curve up to the quantity produced In a competitive market without any intervention, aggregate surplus is maximized
No deadweight loss: reduction in aggregate surplus below its maximum possible value
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