MICRO 6

• Mkt structure

  1. 1 firm = monopoly
  2. few firms = oligopoly
  3. many firms

  diff product = monopolistic comp

  identical product = perfect comp
• A firm's SR supply decision

  P is determined by the mkt

  For a perfectly competitive firm P=MR

  A profit maximising firm produces where MR=MC (P=MR=MC) (derived from profit function)

  The firm will only produce if the price lies above its SAVC curve and only covers all their costs if it is at least equal to its SATC curve

  Many buyers and sellers

  Homogeneous goods (identical)

  Perfect info

  Free entry and exit
• Eff -> lack of externalities              

  IF overproduce, - externalities        

  IF underproduce, +externalities

  They don't internalise the externality they impose on society through their production of the goods.
• Perfect Competition Graph

  AR = Average Revenue                                             

  MR = Marginal Revenue                                           

  AC/ATC = Average (Total) Cost                           e.g.

  MC = Marginal Cost                                              Profit maximising output is Q=75 and corresponding price is P=1.75

  TR = P x Q

  AR = P

  MR = dTR/ dQ
• SR eqm of a competitive firm

  1. Supernormal/ abnormal profit (ec profit > 0)                     
  2. Normal profit (ec profit = 0)
  3. Losses/ subnormal profit (ec profit < 0)
• Shut down rule

  TR<SVC or P<SAVC
• Supply curve :

  SR = SMC, SATC, SAVC

  LR = LMC, LAC
• Productive eff

  Goods and serv r prod at their lower cost. Points on PPF r productively efficient.

  Allocative eff

  Not possible to make someone better off without making someone else worse off

  Produce P = MC, at this output lv sum of CS and PS is max.

  Implies a pt on PPF which the combi of goods represents what the society desires most.

   

  Perfectly competitive mkt achieve both

  Firms prod on average cost curves, based on lowest cost combi of inputs and therefore achieving prod eff.

  Prod at the output lv P=MC. At this output lv the sum of CS and PS is max.