Chapter 3 - Competitive markets and perfect competition

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usman ahmed
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usman ahmed
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Chapter 3 - Competitive markets and perfect competition
  1. Perfect competition assumptions
    1. Many buyers and sellers
      1. Firms are price takers
        1. homogenous product
          1. perfect knowledge of product/service
            1. perfect mobility of factors
              1. readily available information
                1. No barriers to entry or exit
                2. Super-normal profit in short term only
                  1. In long run firms are statically efficient, but not dynamically efficient
                    1. Static - Allocative(AR=MC) & Productive(MC=AC)
                      1. Dynamic - R+D that lowers the LRAC
                      2. Shutdown point - firm will choose to continue production or stop trading depending on which option gives a lower loss
                        1. Cannot price below AVC curve, else it shuts down immediately
                        2. Agriculture resembles P.C.
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