Determination of price and quantity supplied in perfectly competitive market in the short run treating demand as exogenous: Difference between revisions
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* Similarly, increasing the price above the market price will cause the firm to lose all its customers to competing firms. | * Similarly, increasing the price above the market price will cause the firm to lose all its customers to competing firms. | ||
==The optimization process is two- | ==Treatment of the market demand curve as exogenous== | ||
This page does not deal with the story behind the [[market demand curve]], which is treated as exogenously determined. | |||
This page ''does'' combine a discussion of the determination of the market supply curve and the determination of the equilibrium point once both the supply and demand curves are known. The two levels can be neatly separated. However, this neat separation is a feature specific to competitive markets and does not apply to other [[market structure]]s such as monopolistic or oligopolistic structures. Thus, for an easy point of comparison with these alternative structures, we provide the combined analysis here. | |||
==The optimization process is two-level== | |||
In a perfectly competitive market, there are two levels of optimization. | In a perfectly competitive market, there are two levels of optimization. | ||
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! Level !! What gets determined here !! What data is used? !! Details !! More information | ! Level !! What gets determined here !! What data is used? !! Details !! More information | ||
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| Single firm, deliberately attempting to optimize for profit || Optimal quantity to produce as a function of price, encoded in the short run supply curve || The firm's marginal cost curve ''only''. The market demand curve is not used. || The firm uses its marginal cost curve to determine the optimal quantity to produce as a function of market price. In other words, for any given market price, the firm can use its marginal cost curve to determine the optimal quantity to produce. This choice is encoded in the firm's short run supply curve, which in turn is determined by the firm's marginal cost curve. Although it is not immediately obvious, the firm's short run supply curve coincides geometrically with (part of) the firm's marginal cost curve. || [[Determination of quantity supplied by firm in perfectly competitive market in the short run]] | | Single firm, deliberately attempting to optimize for profit || Optimal quantity to produce as a function of price, encoded in the firm's individual short run supply curve. These can be aggregated to obtain the market supply curve. || The firm's marginal cost curve ''only''. The market demand curve is not used. || The firm uses its marginal cost curve to determine the optimal quantity to produce as a function of market price. In other words, for any given market price, the firm can use its marginal cost curve to determine the optimal quantity to produce. This choice is encoded in the firm's short run supply curve, which in turn is determined by the firm's marginal cost curve. Although it is not immediately obvious, the firm's short run supply curve coincides geometrically with (part of) the firm's marginal cost curve. || [[Determination of quantity supplied by firm in perfectly competitive market in the short run]] | ||
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| Market as a whole, including all firms making micro-adjustments but not necessarily with full information || The market price and quantity traded || The market demand curve (though an individual seller may see only a part thereof) || Firms experiment with raising or lowering prices, and correspondingly raising or lowering the quantity produced (while staying on their individual short run supply curve obtained above) until the market clears. Note that the short run market supply curve used in the analysis of convergence is obtained by adding up all the short run supply curves for individual supply curves obtained at the preceding level. || [[Convergence towards market price]]. | | Market as a whole, including all firms making micro-adjustments but not necessarily with full information || The market price and quantity traded || The market demand curve (though an individual seller may see only a part thereof) || Firms experiment with raising or lowering prices, and correspondingly raising or lowering the quantity produced (while staying on their individual short run supply curve obtained above) until the market clears. Note that the short run market supply curve used in the analysis of convergence is obtained by adding up all the short run supply curves for individual supply curves obtained at the preceding level. || [[Convergence towards market price]]. | ||