Unit 10
                                                                            Economics - 6th
                                                                               year
                                                                           Assumptions on
                                                                           Perfect
                                                                           Competition
                                   Unit 10                                 TheShort-Run
                                                                           Equilibrium
                              Perfect Competition                          TheLong-Run
                                                                           Equilibrium
                             Economics - 6th year
                                     EURSC
                                  2007/2008
        Assumptions on Perfect Competition                                     Unit 10
        Whatis Perfect Competition                                          Economics - 6th
                                                                               year
                                                                           Assumptions on
                                                                           Perfect
                                                                           Competition
                                                                           TheShort-Run
           ◮ Markets are “perfectly compeitive” if                         Equilibrium
                                                                           TheLong-Run
                ◮ There are many buyers and sellers so that none has       Equilibrium
                   influence on price.
                ◮ There is freedom of entry and exit (in the long run)
                ◮ There is perfect knowledge of prices by buyers and
                   sellers and agents are symmetric respect to
                   information.
                ◮ All firms produce an homogenous and identical
                   products. No branding or other marketing techniques
                   of price discrimination.
        Assumptions on Perfect Competition                                    Unit 10
        Examples of Perfect Competition Markets                            Economics - 6th
                                                                               year
                                                                          Assumptions on
                                                                          Perfect
                                                                          Competition
           ◮ Themarketfor some agricultural produces (wheat,              TheShort-Run
              corn, soya beans).                                          Equilibrium
                                                                          TheLong-Run
                ◮ Manysellers but a few buyers                            Equilibrium
                ◮ Marketing techniques and branding (certificates of
                   origin)
           ◮ Thestock exchange market.
                ◮ Asymmetries in the information
           ◮ Thee-bayauctions
                ◮ Asymmetries in the information
                ◮ Branding, part-sales and other marketing techniques.
           ◮ Thefully-competitive market DOES NOT exist!!
        Assumptions on Perfect Competition                                    Unit 10
        Theindividual and market demands                                   Economics - 6th
                                                                               year
                                                                          Assumptions on
                                                                          Perfect
                                                                          Competition
           ◮ Theimpactofindividual firm decisions on total output          TheShort-Run
                                                                          Equilibrium
              is negligible in a perfect competition market.              TheLong-Run
           ◮ Firms cannot affect price by increasing or decreasing        Equilibrium
              output
           ◮ Adistinction is made between market demand and
              demandfacedbyanindividual firm.
                ◮ Market demand is as always negative slope
                ◮ Demandfacedbyanindividual firm is an perfectly
                   elastic (horizontal line)
           ◮ Thus, a firm in perfect competition can sell all the
              output it can produce at the current market price.
            Price
           100
            50     Market Price
                                                     Demand for each individual firm
            40
            30
                                                                      Market Demand
            20
            10
            00            2            4          6            8           10    Quantity
        TheShort-Run Equilibrium                                               Unit 10
        Individual Offer Curve                                              Economics - 6th
                                                                               year
                                                                           Assumptions on
                                                                           Perfect
                                                                           Competition
           ◮ Weshowedthattheindividual offer curve is given by             TheShort-Run
              the marginal cost curve.                                     Equilibrium
                                                                           TheLong-Run
           ◮ ...but only as long as the firm wants to keep                  Equilibrium
              producing
                ◮ If the MC is above the AC, the firm gets positive
                   profits.
                ◮ If the MC is below the AC but above the AVC, still the
                   firmwantstoproduce
                ◮ Thefirmwantstostopproducingif they cannot even
                   afford variable costs (MC below AVC).
           ◮ Thus, the individual offer curve is the part of the MC
              above the AVC.
           Costs
          100
           50                      Firm wants to produce
           40
           30
           20                                                       ­­ MC
                                                                    ­­ ATC
                                                                    ­­ AVC
           10
           00           2          4          6          8          10   Quantity
           Costs
          100
           50
           40
           30
           20                                                       ­­ MC
                                                                    ­­ ATC
                                                                    ­­ AVC
           10       Firm does not 
                      produce
           00           2          4          6          8          10   Quantity