Nadia Grant –Reid

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W. . Hal. Intermediate Informatio Microeconomics.  Students may be directed to additional readings. Norton. Norton and Company n  Recommended Texts:  “Pyndyck and Rubenfield. 7th Edition – W. Microeconomics (Any Edition)“  Any other Intermediate Microeconomics text can be used for support.  Prescribed Text: Course  "Varian.

 Start now Optimal Study  Try to understand rather than simply memorize material Approach  Do periodic revisions of material covered earlier  Use your own examples and summaries to identify and explain principles  Take good personal notes and read them over soon after writing them  Please Work Your Problem Sets Before Attending Tutorials .

Firm Supply in Competitive Markets • Market Environment: ways firms interact in making pricing and output decisions. • Possibilities: (1) Perfect Competition (2) Monopoly (3) Oligopoly (4) Imperfect Competition (monopolistic) .

Perfect Competition .

 There is ease of entry and exit. Perfect Competition  First. this assumption is justified by the fact that there are many producers and consumers. we will take a look at market equilibrium under perfect competition.  In perfect competition no market participant can influence the market price through its action (price taker). .  In many markets. and each one thus only exerts a negligible effect on the price.

O The demand side consists of all potential buyers. O Total market demand is simply the sum of all individual demands. O The demand of an individual consumer is the solution of the utility maximization problem subject to the individual budget restriction. .


Market demand is dependent on both the aggregate income level and the distribution of income. O In addition.O Recall: O Individual demand for a particular good is dependent not only on its price but also on the prices of all the other goods. This holds equally for market demand. . individual demand is dependent on the consumer’s level of income.

selling and distributing them. O The profit represents the difference between the earnings from the sale of these goods and the costs of producing. .O The supply side consists of all potential sellers. O The individual firm selects the quantity supplied that maximizes its profit at a given level of input- and output prices.

Competitive Firm Maximization Problem The first and second order conditions are : .

the second derivative of profit at y* must be positive or the marginal cost curve must be upward sloping at a profit-maximizing output The solution to that condition gives you the firms . This would yield you the standard condition within the perfect competitive framework. The FOC requires that marginal return (p) corresponds to marginal costs c’(y). that price must equate with marginal cost of production The SOC ensures that the profit is at a maximum (rather than a minimum) That is.

O The supply function of the individual firm is that part of the marginal cost curve that has a positive slope and lies above average variable costs .

O The intersection of the supply and demand curves determines the equilibrium price (p*) and the equilibrium quantity (q*).O The market supply curve is again the sum of all individual supply curves. .

In the short term the number of firms in a market is fixed. O This equilibrium is a short- term equilibrium. and every firm sells the profit maximizing quantity of goods. In the long term. .O Every consumer buys the optimum quantity of goods. free entry and exit are possible. on the other hand.

equilibrium is characterized by two conditions. O The first of these two conditions demands that the market is cleared (the market clearing condition).O In the long term. .

O The market clearing condition and the zero profit condition together determine the price and quantity of a good in long- term equilibrium as well as the number of firms J. . Positive profits attract new firms to the market.O The second condition demands that firms in equilibrium make no profit. losses cause firms to leave the market (zero profit condition).

• (ii) Producer Efficiency: when firm cannot reduce cost by shifting input mix. all external costs and benefits have been ‘internalized’. Three conditions must hold: • (i) Consumer Efficiency: when consumer cannot increase utility by reallocating budget. .e. i.Perfect competition and Efficiency • Perfect competition achieves allocative efficiency implies all factors of production and all commodities demanded by consumers are in their best use and receive their opportunity cost. it is assumed that there are no external cost or benefits. Further.

Gains from trade to consumer is called consumer surplus which measures difference between what consumer are willing to pay and what they actually pay for a total quantity of a good or service at market price. • Therefore total surplus is at its maximum in competitive equilibrium .Perfect competition and Efficiency • (iii) Exchange Efficiency: when all gains from trade have been exhausted. Gains from trade to producers are called producer surplus which measures the difference between what producer are willing to accept and what they actually receive for providing a market equilibrium level of supply.

there is free entry and exit) cannot be applied to most markets.O The assumptions of perfect competition (identical goods. O The opposite end of this spectrum is monopoly . consumers and producers are price takers. O Perfect competition can be seen as an extreme form of a market type in a spectrum ranging from more to less competitive.