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Intermediate Microeconomics


6. Perfect Competition


Competitive markets are composed of many firms selling identical products. Firm in such market settings take the market price as given; that is, they are unable to influence it with their output decisions. Competitive firms are unable to affect the market price for two reasons: (1) They represent a very small share of the total output produced in that market, and (2) the firms in the market are selling identical goods. In the Pencasts in this series, we cover the derivation of a representative firm's demand curve, profit maximization, the shutdown decision, the impact of government interventions on output and profits, the derivation of the market supply curve, and changes in short- and long-run equilibria.


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Competitive Markets

This Screencast discusses the basics of competitive markets, including the number of firms in the market, the homogeneity of the goods supplied in such markets, the ease at which firms enter and exit, the inability of one firm to influence the market price, and how firms make production decisions. [Play ScreenCast]


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Derivation of a Competitive Firm's Residual Demand Curve

In this Pencast, we show to derive the residual demand curve, which is the demand not met by other sellers, facing a firm in a competitive market. [Play Pencast]


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Elasticity of the Competitive Firm's Residual Demand Curve

In this Pencast, we show that the competitive firm's residual demand is substantially more elastic than the market demand curve. [Play Pencast]


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Optimal Output Rule

In this Pencast, we show that a competitive maximizes their profit by producing the quantity that corresponds to the point where marginal profit equals zero. Equivalently, a competitive firm chooses its output such that its marginal revenue and marginal cost are equal. [Play Pencast]


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Graph of the Optimal Output Rule

In this Pencast, we depict graphically the optimal output rule for firms in competitive markets. [Play Pencast]


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Shutdown Rule

In this Pencast, we discuss and present the rule that competitive firms use to determine whether or not to produce a positive quantity of output. [Play Pencast]


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Graph of Shutdown Rule

In this Pencast, we present three examples of the shutdown decision. The first is a situation in which the firm should shutdown. The second is a situation in which the firm is indifferent between shutting down and producing. The third is a situation in which the firm should shut down despite incurring a loss.[Play Pencast]


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Profit in the Short Run

In this Pencast, we write down the profit function and derive an equivalent but useful way of writing the profit function. In addition, we provide a graphical representation of profit maximization. [Play Pencast]


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Per-Unit Tax and Output

In this Pencast, we use calculus to show the pretax and posttax output rules and show that a per-unit tax necessarily lowers a competitive firm's output. [Play Pencast]


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Short-Run Supply Curve for an Individual Firm

In this Pencast, we use a graph of a competitive firm to identify their individual short-run supply curve. [Play Pencast]


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Short-Run Market Supply Curve with Identical Firms

In this Pencast, we use a representative firm's short-run supply curve to show that the shape of the market supply curve depends on the number of firms in the market. It is shown that an increase in the number of firms results in a relatively more elastic supply curve. [Play Pencast]


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Short-Run Market Supply with Different Firms

In this Pencast, we show how to derive the short-run market supply curve when firms in the market have different costs. An example is provided with two types of firms, one with relatively lower costs and another with relatively higher costs. The result is a kinked short-run market supply curve. [Play Pencast]


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Short-Run Competitive Equilibrium: A Change in Demand

In this Pencast, we illustrate how a change in demand affects the short-run competitive equilibrium. [Play Pencast]


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Short-Run Competitive Equilibrium: A Change in Costs

In this Pencast, we illustrate how a change in costs, in particular an increase in variable costs, affects the short-run competitive equilibrium. [Play Pencast]


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Profit Maximization in the Long Run

This Screencast discusses the competitive firm's production decisions in the long run. In effect, the long-run objectives are the same as those in the short run. [Play ScreenCast]


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Long-Run Market Supply

This Screencast discusses the three possible shapes of the long-run market supply curve: perfectly elastic (horizontal), upward sloping and downward sloping. Information on what gives rises to such shapes is provided. [Play ScreenCast]


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Long-Run Firm and Market Supply Curves

In this Pencast, we use graphs of a representative firm and the market to illustrate the competitive firm's long-run supply curve and the long-run market supply curve. [Play Pencast]


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Long-Run Equilibrium

In this Pencast, we discuss and illustrate graphically what it means for a market to be in long-run equilibrium. [Play Pencast]


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Short- and Long-Run Equilibria: An Increase in Demand

In this Pencast, we illustrate how an increase in demand affects the representative firm and the market in the short run and the long run. [Play Pencast]


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Short- and Long-Run Equilibria: A Decrease in Demand

In this Pencast, we illustrate how an decrease in demand affects the representative firm and the market in the short run and the long run. [Play Pencast]


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Short- and Long-Run Equilibria: Per-Unit Taxes

In this Pencast, we illustrate how a per-unit tax affects the representative firm and the market in the short run and the long run. [Play Pencast]


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Short- and Long-Run Equilibria: Per-Unit Subsidy

In this Pencast, we illustrate how a per-unit subsidy affects the representative firm and the market in the short run and the long run. [Play Pencast]


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Short- and Long-Run Equilibria: Lump-Sum Taxes

In this Pencast, we illustrate how a lump-sum tax affects the representative firm and the market in the short run and the long run. [Play Pencast]


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Short- and Long-Run Equilibria: Lump-Sum Subsidy

In this Pencast, we illustrate how a lump-sum subsidy affects the representative firm and the market in the short run and the long run. [Play Pencast]


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