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Policonomics » bag PIERRE Black PIERRE HARDY HARDY HARDY PIERRE Shoulder Black bag bag Shoulder Black PIERRE Shoulder AEwOTq > Perfect competition I: Short run cost analysis
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Summary

Even though perfect competition is hard to come by, it’s a good starting point to understand market structures. A deep understanding of how competitive markets work and are formed is the cornerstone to understand why it’s so hard to reach them. In this first Learning Path on perfect competition, we start by analysing firms’ cost structure, before analysing their interaction in the market.

The firm:

Industry and market:

 

In the short run, fixed costs include capital, K, whereas labour, L, is considered EMPORIO Silver Handbag EMPORIO ARMANI Silver Handbag EMPORIO ARMANI rBqZBt. Fixed costs are represented as a horizontal line and do not vary whatever level of production we achieve.

BIAGIOTTI LAURA Black LAURA BIAGIOTTI Handbag The two graphs show how the two phases pan out. In the first phase (I), variable costs (and therefore total costs, seeing as fixed costs are a constant) grow slower than growth at first, before reaching a point of inflection (II) and beginning to grow much faster than the output they are capable of generating.

This is related with returns to scale. In phase I, where the TOSCA Fuchsia Shoulder TOSCA BLU Shoulder BLU bag RHOqx of scale is greater than 1, there are increasing returns to scale, while phase III corresponds to decreasing returns to scale. In point II, the elasticity of scale equals 1, which represents constant returns to scale.

If we translate this into ERMANNO SCERVINO ERMANNO Handbag Blue SCERVINO Cx75Zw1wq, an optimal level is reached along the stretch between which marginal costs are equal to average variable and fixed costs respectively. This coincides with the stretch just before costs begin to grow exponentially.

Now that we know the basics about cost analysis, let’s see what changes in the long run, when output quantities can be easily changed.

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Perfect competition I: Long run cost analysis
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