CHAPTER 8 Perfect Competition Designed by Amy Mcguire, B-Books, Ltd
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Microeconomics Exam Review Chapters 8 Through 12, 16, 17 and 19
MICROECONOMICS EXAM REVIEW CHAPTERS 8 THROUGH 12, 16, 17 AND 19 Key Terms and Concepts to Know CHAPTER 8 - PERFECT COMPETITION I. An Introduction to Perfect Competition A. Perfectly Competitive Market Structure: • Has many buyers and sellers. • Sells a commodity or standardized product. • Has buyers and sellers who are fully informed. • Has firms and resources that are freely mobile. • Perfectly competitive firm is a price taker; one firm has no control over price. B. Demand Under Perfect Competition: Horizontal line at the market price II. Short-Run Profit Maximization A. Total Revenue Minus Total Cost: The firm maximizes economic profit by finding the quantity at which total revenue exceeds total cost by the greatest amount. B. Marginal Revenue Equals Marginal Cost in Equilibrium • Marginal Revenue: The change in total revenue from selling another unit of output: • MR = ΔTR/Δq • In perfect competition, marginal revenue equals market price. • Market price = Marginal revenue = Average revenue • The firm increases output as long as marginal revenue exceeds marginal cost. • Golden rule of profit maximization. The firm maximizes profit by producing where marginal cost equals marginal revenue. C. Economic Profit in Short-Run: Because the marginal revenue curve is horizontal at the market price, it is also the firm’s demand curve. The firm can sell any quantity at this price. III. Minimizing Short-Run Losses The short run is defined as a period too short to allow existing firms to leave the industry. The following is a summary of short-run behavior: A. Fixed Costs and Minimizing Losses: If a firm shuts down, it must still pay fixed costs. -
Monopolistic Competition in General Equilibrium: Beyond the CES Evgeny Zhelobodko, Sergey Kokovin, Mathieu Parenti, Jacques-François Thisse
Monopolistic competition in general equilibrium: Beyond the CES Evgeny Zhelobodko, Sergey Kokovin, Mathieu Parenti, Jacques-François Thisse To cite this version: Evgeny Zhelobodko, Sergey Kokovin, Mathieu Parenti, Jacques-François Thisse. Monopolistic com- petition in general equilibrium: Beyond the CES. 2011. halshs-00566431 HAL Id: halshs-00566431 https://halshs.archives-ouvertes.fr/halshs-00566431 Preprint submitted on 16 Feb 2011 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. WORKING PAPER N° 2011 - 08 Monopolistic competition in general equilibrium: Beyond the CES Evgeny Zhelobodko Sergey Kokovin Mathieu Parenti Jacques-François Thisse JEL Codes: D43, F12, L13 Keywords: monopolistic competition, additive preferences, love for variety, heterogeneous firms PARIS-JOURDAN SCIENCES ECONOMIQUES 48, BD JOURDAN – E.N.S. – 75014 PARIS TÉL. : 33(0) 1 43 13 63 00 – FAX : 33 (0) 1 43 13 63 10 www.pse.ens.fr CENTRE NATIONAL DE LA RECHERCHE SCIENTIFIQUE – ECOLE DES HAUTES ETUDES EN SCIENCES SOCIALES ÉCOLE DES PONTS PARISTECH – ECOLE NORMALE SUPÉRIEURE – INSTITUT NATIONAL DE LA RECHERCHE AGRONOMIQUE Monopolistic Competition in General Equilibrium: Beyond the CES∗ Evgeny Zhelobodko† Sergey Kokovin‡ Mathieu Parenti§ Jacques-François Thisse¶ 13th February 2011 Abstract We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. -
Perfect Competition--A Model of Markets
Econ Dept, UMR Presents PerfectPerfect CompetitionCompetition----AA ModelModel ofof MarketsMarkets StarringStarring uTheThe PerfectlyPerfectly CompetitiveCompetitive FirmFirm uProfitProfit MaximizingMaximizing DecisionsDecisions \InIn thethe ShortShort RunRun \InIn thethe LongLong RunRun FeaturingFeaturing uAn Overview of Market Structures uThe Assumptions of the Perfectly Competitive Model uThe Marginal Cost = Marginal Revenue Rule uMarginal Cost and Short Run Supply uSocial Surplus PartPart III:III: ProfitProfit MaximizationMaximization inin thethe LongLong RunRun u First, we review profits and losses in the short run u Second, we look at the implications of the freedom of entry and exit assumption u Third, we look at the long run supply curve OutputOutput DecisionsDecisions Question:Question: HowHow cancan wewe useuse whatwhat wewe knowknow aboutabout productionproduction technology,technology, costs,costs, andand competitivecompetitive marketsmarkets toto makemake outputoutput decisionsdecisions inin thethe longlong run?run? Reminders...Reminders... u Firms operate in perfectly competitive output and input markets u In perfectly competitive industries, prices are determined in the market and firms are price takers u The demand curve for the firm’s product is perceived to be perfectly elastic u And, critical for the long run, there is freedom of entry and exit u However, technology is assumed to be fixed The firm maximizes profits, or minimizes losses by producing where MR = MC, or by shutting down Market Firm P P MC S $5 $5 P=MR D -
Introduction to Competition Analysis1 Introduction
CUTS INTERNATIONAL 7UP3 PROJECT NATIONAL TRAINING WORKSHOP ON COMPETITION POLICY AND LAW INTRODUCTION TO COMPETITION ANALYSIS1 INTRODUCTION Competition analysis is at the core of the implementation of competition policy and law since it involves the identification, investigation and evaluation of restrictive business practices (RBPs) for the purposes of remedying their adverse effects. Without a proper competition analysis, and a dedicated competition authority to undertake such analyses, it would not be possible to effectively implement even the best competition policy and law in the world. This paper briefly outlines the basic concepts of competition before discussing in more detail the process of competition analysis, covering issues such as: (i) market definition; (ii) entry conditions; (iii) competition case investigation and evaluation; and (iv) remedial action. The paper also discusses a case study on a competition case handled by the competition authority of Zimbabwe, which illustrates the practical application of the various concepts discussed. BASIC CONCEPTS OF COMPETITION The concept of competition is a difficult and complex one, but one has to get a grasp of the issues involved in order to understand and appreciate its analysis. There is no singular concept of competition. It is therefore hardly surprising that the term ‘competition’ is defined in very few, if any, competition legislation of both developing and developed countries. Schools of Thought on Competition There are a number of different uses, definitions and concepts of the term ‘competition’ depending on who one is and what purpose one wants to use the definition for2. Consumers, business persons, economists and lawyers all use different concepts and definitions of competition. -
Marxist Economics: How Capitalism Works, and How It Doesn't
MARXIST ECONOMICS: HOW CAPITALISM WORKS, ANO HOW IT DOESN'T 49 Another reason, however, was that he wanted to show how the appear- ance of "equal exchange" of commodities in the market camouflaged ~ , inequality and exploitation. At its most superficial level, capitalism can ' V be described as a system in which production of commodities for the market becomes the dominant form. The problem for most economic analyses is that they don't get beyond th?s level. C~apter Four Commodities, Marx argued, have a dual character, having both "use value" and "exchange value." Like all products of human labor, they have Marxist Economics: use values, that is, they possess some useful quality for the individual or society in question. The commodity could be something that could be directly consumed, like food, or it could be a tool, like a spear or a ham How Capitalism Works, mer. A commodity must be useful to some potential buyer-it must have use value-or it cannot be sold. Yet it also has an exchange value, that is, and How It Doesn't it can exchange for other commodities in particular proportions. Com modities, however, are clearly not exchanged according to their degree of usefulness. On a scale of survival, food is more important than cars, but or most people, economics is a mystery better left unsolved. Econo that's not how their relative prices are set. Nor is weight a measure. I can't mists are viewed alternatively as geniuses or snake oil salesmen. exchange a pound of wheat for a pound of silver. -
Chapter 5 Perfect Competition, Monopoly, and Economic Vs
Chapter Outline Chapter 5 • From Perfect Competition to Perfect Competition, Monopoly • Supply Under Perfect Competition Monopoly, and Economic vs. Normal Profit McGraw -Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw -Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. From Perfect Competition to Picking the Quantity to Maximize Profit Monopoly The Perfectly Competitive Case P • Perfect Competition MC ATC • Monopolistic Competition AVC • Oligopoly P* MR • Monopoly Q* Q Many Competitors McGraw -Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw -Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Picking the Quantity to Maximize Profit Characteristics of Perfect The Monopoly Case Competition P • a large number of competitors, such that no one firm can influence the price MC • the good a firm sells is indistinguishable ATC from the ones its competitors sell P* AVC • firms have good sales and cost forecasts D • there is no legal or economic barrier to MR its entry into or exit from the market Q* Q No Competitors McGraw -Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw -Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. 1 Monopoly Monopolistic Competition • The sole seller of a good or service. • Monopolistic Competition: a situation in a • Some monopolies are generated market where there are many firms producing similar but not identical goods. because of legal rights (patents and copyrights). • Example : the fast-food industry. McDonald’s has a monopoly on the “Happy Meal” but has • Some monopolies are utilities (gas, much competition in the market to feed kids water, electricity etc.) that result from burgers and fries. -
Perfect Competition
Perfect Competition 1 Outline • Competition – Short run – Implications for firms – Implication for supply curves • Perfect competition – Long run – Implications for firms – Implication for supply curves • Broader implications – Implications for tax policy. – Implication for R&D 2 Competition vs Perfect Competition • Competition – Each firm takes price as given. • As we saw => Price equals marginal cost • PftPerfect competition – Each firm takes price as given. – PfitProfits are zero – As we will see • P=MC=Min(Average Cost) • Production efficiency is maximized • Supply is flat 3 Competitive industries • One way to think about this is market share • Any industry where the largest firm produces less than 1% of output is going to be competitive • Agriculture? – For sure • Services? – Restaurants? • What about local consumers and local suppliers • manufacturing – Most often not so. 4 Competition • Here only assume that each firm takes price as given. – It want to maximize profits • Two decisions. • ()(1) if it produces how much • П(q) =pq‐C(q) => p‐C’(q)=0 • (2) should it produce at all • П(q*)>0 produce, if П(q*)<0 shut down 5 Competitive equilibrium • Given n, firms each with cost C(q) and D(p) it is a pair (p*,q*) such that • 1. D(p *) =n q* • 2. MC(q*) =p * • 3. П(p *,q*)>0 1. Says demand equals suppl y, 2. firm maximize profits, 3. profits are non negative. If we fix the number of firms. This may not exist. 6 Step 1 Max П p Marginal Cost Average Costs Profits Short Run Average Cost Or Average Variable Cost Costs q 7 Step 1 Max П, p Marginal -
A Pure Theory of Aggregate Price Determination Masayuki Otaki
DBJ Discussion Paper Series, No.0906 A Pure Theory of Aggregate Price Determination Masayuki Otaki (Institute of Social Science, University of Tokyo) June 2010 Discussion Papers are a series of preliminary materials in their draft form. No quotations, reproductions or circulations should be made without the written consent of the authors in order to protect the tentative characters of these papers. Any opinions, findings, conclusions or recommendations expressed in these papers are those of the authors and do not reflect the views of the Institute. A Pure Theory of Aggregate Price Determinationy Masayuki Otaki Institute of Social Science, University of Tokyo 7-3-1 Hongo Bukyo-ku, Tokyo 113-0033, Japan. E-mail: [email protected] Phone: +81-3-5841-4952 Fax: +81-3-5841-4905 yThe author thanks Hirofumi Uzawa for his profound and fundamental lessons about “The General Theory of Employment, Interest and Money.” He is also very grateful to Masaharu Hanazaki for his constructive discussions. Abstract This article considers aggregate price determination related to the neutrality of money. When the true cost of living can be defined as the function of prices in the overlapping generations (OLG) model, the marginal cost of a firm solely depends on the current and future prices. Further, the sequence of equilibrium price becomes independent of the quantity of money. Hence, money becomes non-neutral. However, when people hold the extraneous be- lief that prices proportionately increase with money, the belief also becomes self-fulfilling so far as the increment of money and the true cost of living are low enough to guarantee full employment. -
Quantifying the External Costs of Vehicle Use: Evidence from America’S Top Selling Light-Duty Models
QUANTIFYING THE EXTERNAL COSTS OF VEHICLE USE: EVIDENCE FROM AMERICA’S TOP SELLING LIGHT-DUTY MODELS Jason D. Lemp Graduate Student Researcher The University of Texas at Austin 6.9 E. Cockrell Jr. Hall, Austin, TX 78712-1076 [email protected] Kara M. Kockelman Associate Professor and William J. Murray Jr. Fellow Department of Civil, Architectural and Environmental Engineering The University of Texas at Austin 6.9 E. Cockrell Jr. Hall, Austin, TX 78712-1076 [email protected] The following paper is a pre-print and the final publication can be found in Transportation Research 13D (8):491-504, 2008. Presented at the 87th Annual Meeting of the Transportation Research Board, January 2008 ABSTRACT Vehicle externality costs include emissions of greenhouse and other gases (affecting global warming and human health), crash costs (imposed on crash partners), roadway congestion, and space consumption, among others. These five sources of external costs by vehicle make and model were estimated for the top-selling passenger cars and light-duty trucks in the U.S. Among these external costs, those associated with crashes and congestion are estimated to be the most practically significant. When crash costs are included, the worst offenders (in terms of highest external costs) were found to be pickups. If crash costs are removed from the comparisons, the worst offenders tend to be four pickups and a very large SUV: the Ford F-350 and F-250, Chevrolet Silverado 3500, Dodge Ram 3500, and Hummer H2, respectively. Regardless of how the costs are estimated, they are considerable in magnitude, and nearly on par with vehicle purchase prices. -
Demand Composition and the Strength of Recoveries†
Demand Composition and the Strength of Recoveriesy Martin Beraja Christian K. Wolf MIT & NBER MIT & NBER September 17, 2021 Abstract: We argue that recoveries from demand-driven recessions with ex- penditure cuts concentrated in services or non-durables will tend to be weaker than recoveries from recessions more biased towards durables. Intuitively, the smaller the bias towards more durable goods, the less the recovery is buffeted by pent-up demand. We show that, in a standard multi-sector business-cycle model, this prediction holds if and only if, following an aggregate demand shock to all categories of spending (e.g., a monetary shock), expenditure on more durable goods reverts back faster. This testable condition receives ample support in U.S. data. We then use (i) a semi-structural shift-share and (ii) a structural model to quantify this effect of varying demand composition on recovery dynamics, and find it to be large. We also discuss implications for optimal stabilization policy. Keywords: durables, services, demand recessions, pent-up demand, shift-share design, recov- ery dynamics, COVID-19. JEL codes: E32, E52 yEmail: [email protected] and [email protected]. We received helpful comments from George-Marios Angeletos, Gadi Barlevy, Florin Bilbiie, Ricardo Caballero, Lawrence Christiano, Martin Eichenbaum, Fran¸coisGourio, Basile Grassi, Erik Hurst, Greg Kaplan, Andrea Lanteri, Jennifer La'O, Alisdair McKay, Simon Mongey, Ernesto Pasten, Matt Rognlie, Alp Simsek, Ludwig Straub, Silvana Tenreyro, Nicholas Tra- chter, Gianluca Violante, Iv´anWerning, Johannes Wieland (our discussant), Tom Winberry, Nathan Zorzi and seminar participants at various venues, and we thank Isabel Di Tella for outstanding research assistance. -
Classical Vs Neoclassical Conceptions of Competition
ISSN 1791-3144 University of Macedonia Department of Economics Discussion Paper Series Classical vs. Neoclassical Conceptions of Competition Lefteris Tsoulfidis Discussion Paper No. 11/2011 Department of Economics, University of Macedonia, 156 Egnatia str, 540 06 Thessaloniki, Greece, Fax: + 30 (0) 2310 891292 http://econlab.uom.gr/econdep/ 1 Classical vs. Neoclassical Conceptions of Competition∗ By Lefteris Tsoulfidis Associate Professor, Department of Economics University of Macedonia 156 Egnatia Street, 540 06, Thessaloniki, Greece Tel. 2310 891-788, Fax 2310 891-786 Homepage: http://econlab.uom.gr/~lnt/ Abstract This article discusses two major conceptions of competition, the classical and the neoclassical. In the classical conception, competition is viewed as a dynamic rivalrous process of firms struggling with each other over the expansion of their market shares. This dynamic view of competition characterizes mainly the works of Smith, Ricardo, J.S. Mill and Marx; a similar view can be also found in the writings of Austrian economists and the business literature. By contrast, the neoclassical conception of competition is derived from the requirements of a theory geared towards static equilibrium and not from any historical observation of the way in which firms actually organize and compete with each other. Key Words: B12, B13, B14, L11 JEL Classification Codes: Classical Competition, Regulating Capital, Incremental Rate of Return, Rate of Profit, Perfect Competition. 1. Introduction This article contrasts the classical and the neoclassical theories of competition, starting with the classical one as this was developed in the writings of Smith, Ricardo, J.S. Mill and more explicitly analyzed in Marx’s Capital. The claim that this paper raises is that the classical conception of competition despite its realism was gradually replaced by the neoclassical one, according to which competition is an end state rather than a description of the way in which firms organize and actually compete with each other. -
Chapter 9 Keynesian Models of Aggregate Demand
Economics 314 Coursebook, 2010 Jeffrey Parker 9 KEYNESIAN MODELS OF AGGREGATE DEMAND Chapter 9 Contents A. Topics and Tools ............................................................................ 2 B. Comparative-Static Analysis of the Closed-Economy Basic Keynesian Model 3 Expenditure equilibrium and the IS curve ....................................................................... 4 Expenditures and the IS curve ....................................................................................... 5 Money demand and monetary policy.............................................................................. 7 The LM curve .............................................................................................................. 8 The MP curve .............................................................................................................. 9 Aggregate demand and aggregate supply ......................................................................... 9 C. Some Simple Aggregate-Supply Models ............................................... 10 Case 1: Nominal-wage stickiness .................................................................................. 11 Case 2: Inflation stickiness with competitive labor market ............................................... 12 Case 3: Inflation stickiness with labor-market imperfections ............................................ 13 Case 4: Sticky wages with imperfect competition ............................................................ 13 D. The Open Economy .......................................................................