Chapter 8: PERFECT COMPETITION
1. Market structure and perfect competition
2. Basics of demand and supply
3. Competitive equilibrium (short run and long run)
4. Market efficiency
Reading: All
Problems: 2-5,7-10
WHAT YOU SHOULD BE ABLE TO DO
1. Find equilibrium prices and quantities, excess demand or supply.
2. Handle changes in demand and supply including problems with taxes and subsidies.
3. Determine the competitive firm's output and its supply function (including determination of the shut-down price.)
4. Determine the long-run competitive price for a constant cost industry; and understand the process of entry and exit.
5. Determine the equilibrium number of firms in long-run market equilibrium.
6. Understand the major efficiency characteristics associated with perfectly competitive markets.
EXAMPLE
A firm has the following SAC function. SAC = 250/Q + 20 + 2.5Q
a. What is the firm's STC equation?
b What is the equation for the SMC?
c. Determine the firm's AVC and its shut-down price
d. If the price of the good produced by the firm (in a perfectly competitive market) is $60, how many units will the firm produce? Compute thefirm's profits.
e. Detrmine the firm's supply function.
f. Suppose that there are 500 identical firms in the industry. Determine the industry supply equation.
g. If QD = 12,000-40P, find the equilibrium market price and quantity.
h. Suppose a $10 unit tax is imposed. Determine the new equilibrium price and quantity.
i. Assume for simpicity that the cost functions also apply to the long-run so that LAC= 250/Q + 20 + 2.5Q. What is the long-run equilibrium price for the industry (without the tax)? Assume that it is a constant cost industry.
j. Based on your answer in part g, what will happen in this industry?
k. What is the long-run equilibrium quantity and how many firms will the industry support?
l. Repeat part k assuming a $10 unit tax is imposed.