复旦大学：《产业经济学 Industrial Economics》教学课件_Industrial Organization 2 Perfect Competition

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)

Back to the question: Why care about perfect competition? Look at the underlying assumptions o Price taking benavior o Homogenous products o Frictionless markets(no problems with information no transaction COStS o Freedom of entry and exit Are these assumptions realistic? O No e Perfect competition has certain desirable welfare properties o Maximizes our measure of welfare Consumer surplus(CS)+ Producer Surplus(ps)added across all firms o Producer surplus same as profits 6

6 Back to the question: Why care about perfect competition?  Look at the underlying assumptions oPrice taking behavior oHomogenous products oFrictionless markets (no problems with information, no transaction costs) oFreedom of entry and exit  Are these assumptions realistic? oNo  Perfect competition has certain desirable welfare properties. oMaximizes our measure of welfare: Consumer surplus (CS) + Producer Surplus (PS) {Added across all firms) oProducer surplus same as profits

Continued. W=CS+丌 MC Q Welfare at MC pricing: a+B+r Welfare at a higher price: a+ p Some redistribution but net loss Deadweight loss

7 Continued:   n i W CS  i Welfare at MC pricing:   Welfare at a higher price:    Some redistribution but net loss  Deadweight loss

Note on zero profit condition: o If there is freedom of entry and exit then the factors of production must earn equal to normal return: (Zero profit condition e When firms make zero profit price equals average cost II=(P-AC)Q PAC Ac MC PC eqm with MC free entry PC eaim 8

8 Note on zero profit condition:  If there is freedom of entry and exit then the factors of production must earn equal to normal return: (Zero profit condition)  When firms make zero profit price equals average cost: P  AC)( Q

Classical monopoly: Other extreme market form e Features O Single seller o Uniform price(to differentiate from price discriminating monopoly o Single plant(to differentiate from a multi plant monopoly) o Consumers still competitive o The seller has market power(is a price maker): faces a downward sloping demand curve Monopolists profit ∏=TR-TC II=PQ-TC(Q) Now price is not a constant but will vary with the output chosen by the monopolist

9 Classical Monopoly: Other extreme market form  Features oSingle seller oUniform price (to differentiate from price discriminating monopoly) oSingle plant (to differentiate from a multi plant monopoly). oConsumers still competitive  The seller has market power (is a price maker): faces a downward sloping demand curve.  Monopolist’s profit: PQ TC Q)( TCTR    Now price is not a constant but will vary with the output chosen by the monopolist

Profit maximization by the monopoly Continued o In maximizing profit the monopolist can choose either quantity or price (whichever is chosen the other follows from the demand curve we will follow the convention that monopolist chooses quantity) O FO.c 0 Q d@ o dp d 7C()=0 do d@ dQ →MR=MC Monopolist in order to maximize profits chooses an output such that marginal revenue is equal to marginal cost(makes intuitive sense, .P=100-Q, MC=10---Linear example 10

10 Profit maximization by the monopoly: Continued  In maximizing profit the monopolist can choose either quantity or price (whichever is chosen the other follows from the demand curve: we will follow the convention that Monopolist chooses quantity)  F.O.C. MCMR TC Q dQ d dQ dP Q dQ dQ P dQ d      0)( 0  Monopolist in order to maximize profits chooses an output such that marginal revenue is equal to marginal cost (makes intuitive sense)  P = 100- Q, MC = 10 --- Linear example