Managerial Economics Chapter 7: Perfect Competition 1. Managers have no control over the price of their product.

. They, however choose to produce at the profit max level (i.e., MR=MC . The price is given !y the mar"et. This is a "ey part of perfect competition and is different in all other mar"et structures. #. $erfect competition is concerned with the aggregate demand and supply of the mar"et. %ach individual firm has very little impact on the entire mar"et. &. %'uili!rium 'uantity in perfect competition is found at $=MC ((riginally it)s MR=MC, since in this mar"et $=MR, therefore the profit*max 'uantity is found !y setting $=MC, solve for + . Demand Curves For a firm: ,emand curve is hori-ontal (constant For the entire industry: ,emand curve is downward sloping. ***If the loss from producing is less than the firms fi ed costs! it is more profita"le to produce temperately #at a loss$% If price does not increase in mar&et place! then discontinue production*** 'hutdo(n point: .hen the price e'uals the minimum average varia!le cost. Producer and Consumer 'urplus $ /

C./ $./

, +

Mar"et social welfare is the summation of producer and consumer surplus. )ong*+un Economic Profit in Perfect Competition 0n the long run, perfect competition states that no firm earns economic profit. .hen economic profit is earned in the short*run, firms are induced to enter. This shifts the supply curve to the right and results in a lower price. This will continue to happen till all economic profit is washed away.

***,his all happens "ecause of the no "arriers to entry in a perfectly competitive industry%*** '-).,I-/': %ven*num!ered 'uestions. Pro"lem 0 a The long run e'uili!rium price must !e 12, since this is the minimum long run average total cost of all the firms. The short run e'uili!rium price is where the supply and demand curves intersect. /olving this yields the price of 12. ! 0n the long run, the mar"et price is 12. 3t this price the mar"et is happy to consumer 144,444 !oxes. /ince each firms average cost is minimi-ed when + is 1444 and the total is 144,444 then there are 144 firms. Pro"lem 1 a This is done !y simply plugging different points and connecting the dots. ! $=1 c +=14,444 Pro"lem 2 a $,=$/, +=22 ! /ince the tax is imposed on the supplier the supply curve shifted upwards !y 11 at all 'uantities. The new supply curve is now

$s=2. .e not get +=2#. c 5o, the long run e'uili!rium price must !e 12. 0f the price is 1&.67 then existing firms are only receiving 1#.67 per "nife after they pay for the tax, and they therefore are losing money. This will result in firms leaving the industry which will shift the supply curve to the left at a point where the new price is 12.