Lecture 2: Perfect Competition Definition - a perfectly competitive market is where agents in the market (buyers and sellers are price takers o Price taking behavior: Agent believes that the market price is given and the agent's actions do not influence the market price o Price taking behavior implies that the demand curve facing the firm is horizontal at the market determined price Number of firms inconsequential for the assumption of competitive ehavior
1 Lecture 2: Perfect Competition Definition:- A perfectly competitive market is where agents in the market (buyers and sellers) are price takers. Price taking behavior: Agent believes that the market price is given and the agent’s actions do not influence the market price. Price taking behavior implies that the demand curve facing the firm is horizontal at the market determined price. Number of firms inconsequential for the assumption of competitive behavior
o Large just stands for enough en? o What is large number of firms th number to result in price taking b ehavior o Why use the term large? ● Two reasons o Comparing across two situations price-taking behavior seems more reasonable if there are more firms an less Imperfect competition models in the limit(i.e. as number of firms grows very big: mathematically infinity result in perfectly competitive outcome
2 What is large number of firms then? oLarge just stands for enough number to result in price taking behavior. Why use the term large? Two reasons: Comparing across two situations: price-taking behavior seems more reasonable if there are more firms than less. Imperfect competition models in the limit (i.e. as number of firms grows very big: mathematically infinity) result in perfectly competitive outcome
Technology assumption for PC ● drS or crs but not irs Firms profit maximization problem Il=pq, -TC(qu dq, dTc(u =0 First order condition P= mC Profit O*
3 Technology assumption for PC DRS or CRS but not IRS Firm’s profit maximization problem )( pq11 TC q1 0 )( 1 1 1 1 1 1 dq qdTC dq dq p dq d First order condition: P = MC
IRS→MC<AC MC pricing under irs leads to loss: Total Per unit OSS C MC
4 IRS MC <AC MC pricing under IRS leads to loss:
Perfectly Competitive equilibrium Two things characterize a perfectly competitive equilibrium o All firms maximize profit by choosing output such as price equals marginal cost o Markets clear(aggregate demand equals aggregate supply)
5 Perfectly Competitive Equilibrium: Two things characterize a perfectly competitive equilibrium oAll firms maximize profit by choosing output such as price equals marginal cost. oMarkets clear (aggregate demand equals aggregate supply)