C4: Perfect Competition

Question 1

What is “perfect competition” in our framework? Name the 4 properties.

Answer 1

All producers and consumers are price takers. Identical firms; increasing marginal costs.
Open market: producers and consumers are free to enter / exit the market
Homogenous Good: goods produced by different firms are perfect substitutes
Market Transparency: producers and consumers are well informed about market prices
No Externalities

Question 2

What is a market equilibrium?

Answer 2

The market is in equilibrium if for a given price p, market demand equals market supply. (Q_d(p) = Q_s(p))

Question 3

What is a market imbalance?

Answer 3

No equilibrium -> excess demand or excess supply

Question 4

Skill: finding equilibrium price and quantity given a cost function and demand function (+tax/+subsidy)

Answer 4

find supply parametrized by price by profit maximization:
MC(q) = p => q(p) = ?
calculate threshold price for market entry:
AC(q) = MC(q)
find market supply (n*individual supply)
find equilibrium quantity (price = threshold price)
find number of firms n
find actual equilibrium quantity
find actual price

tax: extra variable cost
subsidy: extra fixed cost

Question 5

Skill: finding consumer, producer, total surplus

Answer 5

CS: shape above price
PS: shape below price
TS: sum