Perfect Competition Flashcards
SR elasticity of supply
% change in Qs in the SR in response to a 1% change in price while holding other factors that affect supply constant
Long run
Perfectly competitive markets - responses in supply = more flexible in LR for 2 reasons
- Firms LR cost curves reflect the greater input flexibility that firms have in LR
- diminishing returns and sharp increase in MC = less important - LR allows firms to enter and exit a market in response to profit opp
- affects pricing
Perfectly competitive market is in LR equilibrium when
A firm has an incentive to change its behaviour
Pricing
As each firm is price taker, profit max requires that the firm produce where price is equal to LRMC (P=MC)
- determines firms output choice and its choice of a specific input combination that min these loss in LR
Profits in LR
Although firms mat earn either +ve/-ve profits in SR, in LR only zero profits prevail
Constant cost case
A marker in which entry or exit has no effect on the cost curves of firms
LR equilibrium for perfect competition market constant cost case
Increase in demand (D curve shucks to right on total market diagram) –> price increases in SR
Increase in Price –> profit –> new firms enter market
If entry of new firms has no effect on cost curves of firms, new firms continue to enter until price falls back to p1
At this P economic profit = 0
LR SC = horizontal at P1
Along LRSC output = increases by number of firms that produce q1
Increase in costs result in positively sloped LRSC
Initially the market is in equilibrium at P1Q1
An increase in demand to D’ causes the price to rise to P2 in SR and the typical firm produces q2 at a profit
This profit attracts new firms
The entry of these new firms causes costs to increase to the levels in b
With new set of curves equilibrium is reestablished in market at P3Q3
By considering many possible demand shifts and connecting all the resulting equilibrium points the LR supply curve
Long run elasticity of supply
% change in Qs in LR in response to a 1% change in P after all adjustments in input P
= %changeQsLR / % change P
Can supply curves be negatively sloped
Yes if input costs decrease
Consumer surplus
Extra value individuals receive from consuming a good over what they pay for it
Producer surplus
What all producers would pay for the right to sell a good at its current market P
SR producer surplus
In SR the market s curve = the horizontal summation of all firms SE MC curves
Curves positive slope reflects diminishing returns to variable inputs that are encountered as output increases
LR producer surplus
Positively sloped supply curves arise because firms experience increase input costs
When market is in equilibrium each firm has 0 profit and no fixed costs
LR producer surplus reflects increase pay,mets being received by firms inputs as output expands
Producer surplus measures all these increase payments relative to a situation where industry produces no output in which case inputs would receive lower prices for their services
Ricardian rent
= LR profit earned by owners of low cost firms
May be capitalised into the prices of these firms inputs
