Perfect Competition Flashcards
What are the two functions of price?
- Tell producers how much to produce
- Ration demand
What is the very short run in perf comp
- no. of firms fixed - no entry and exit
- production level is fixed
- Given a demand shock, in the VSR, prices will increase substantially because supply is fixed and won’t respond at all to ∆P given (in this case) rationing (excess demand)
- Useful in analysis of highly perishables - eggs, milk
What is the short run in perf comp?
- no. of firms fixed - no entry and exit
- production level can be changed
- Large # of identical firms, identical products: price takers
- SR supply curve = upward sloping portion of MC (above min AVC)
What is convention with market and firms?
q vs Q
What is the long run in perf comp?
- More flexibility with input combinations
- Entry& exit of firms into/out of industry
- LR Eqm: No firm has an incentive to change their behaviour
- Firms must be producing output with cost minimising K&L
- No incentive for firms to exit or enter (π=0)
What assumptions are made in LR perf comp analysis?
- All firms have identical cost structure
- π = 0: firms are operating at min ATC
- Therefore produce q* where p=MC=AR=MR=AC(q*)
What are the three scenarios in the LR for perf comp
- Input costs may/may not change as firms enter/exit market
- Constant cost case
- Increasing cost case
- Decreasing cost case
What occurs when LRπ ≠ 0 in the constant cost case and what does this mean about LRS?
- π > 0: firms enter: shift out market supply curve to LR market clearing P
- Each firm returns to old q (at min ATC), but market Q increases: b/c # of firms increases
- LR supply curve is perfectly elastic line at P(minATC)
What is the increasing cost case?
- Entry of firms leads to increase in costs of inputs
- w/v↑ → AC↑
- Whenever inputs are a scare resource
- i.e. downward sloping demand and upward sloping supply
What occurs when LRπ ≠ 0 in the increasing cost case and what does this mean about LRS?
- With new entrants comes an increase in costs of production: AC↑
- Market supply shifts out to NEW min ATC
- P2 > P1
- LR supply is upward sloping, but always more elastic that SRS
What is true about a lump sum tax on cost structure?
- ↑FC e.g. lump sum tax: ↑AC but not MC
- STC = 2q2 + 5q + 100
- AC = 2q + 5 + 100/q
- ↑tax by $50
- STC’ = 2q2 + 5q + 150
- AC’ = 2q + 5 + 150/q
- Marginal Cost doesn’t change
What difference is there between lump sum and per unit subsidies?
- Lumpsum
- ↓AC only, ↑π, ↑n = ↑S
- Overall, Q↑, q↓
- Per unit
- ↓AC + ↓MC, in same amount so straight shift down
- Profit max q↑, π↑, n↑, S↑
- Overall, Q↑, q0∆
What is true of a perfect elastic supply curve?
A flat supply curve (LR constant cost) has 0 producer surplus
What is PS on a SR upward sloping supply curve?
For every unit produced (except the last one q* (optimal)) the intramarginal units return a profit
What is market producer surplus?
- Market producer surplus is the sum of the profits that every firm receives minus the sum of their fixed costs
- Producer surplus is SRπ + FC
- Or the profit that a firm receives from producing rather than shutting down
- π = TR - VC - FC
- PS = TR - VC
