This is a PowerPoint presentation on pure competition.
Download
1 / 27

This is a PowerPoint presentation on pure competition. - PowerPoint PPT Presentation


  • 55 Views
  • Uploaded on

This is a PowerPoint presentation on pure competition. A left mouse click or the enter key will add and element to a slide or move you to the next slide. The back space key will take you back an element or slide. If you wish to exit the presentation, the escape key will do it!.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' This is a PowerPoint presentation on pure competition. ' - maya-saunders


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

This is a PowerPoint presentation on pure competition.

A left mouse click or the enter key will add and element

to a slide or move you to the next slide. The back space

key will take you back an element or slide. If you wish to

exit the presentation, the escape key will do it!

R. Larry Reynoldsã 1997


Pure competition
Pure Competition

  • The word “competition” may be used in two ways;

    • rivalry - {synonym; opposition, antagonism}

    • structural competition or “pure competition”

      • large number of sellers and buyers, none of whom can influence the market,

      • homogeneous or identical products products,

      • relatively free entry and exit from the market. There are no major Barriers to Entry.

      • [Perfect competition includes complete infromation]

Principles of Microeconomics


Price takers
Price Takers

  • Because there is a large number of sellers with identical products, no seller can charge a price above the prevailing market price.

  • There is no reason to sell below the market price.

  • Result: firms are “price takers,” they have no control over the price at which they sell. They may adjust the method and level of output, not the selling price.

  • The market sets the price. Sellers and buyers react.

Principles of Microeconomics


Firm s output
Firm’s Output

  • The firm’s choice of method and level of output is dependent on costs and revenue associated with each output alternative.

  • The costs of production are reflected in the supply side of the model.

  • the revenue of the firm is reflected in the demand functions.

Principles of Microeconomics


Markets and firms
Markets and Firms

  • The role of a market is to coordinate the activities of all the producers and buyers of a good.

  • A firm is an organization that controls the operations of the plant(s) or the physical units of production.

  • For purposes of simplification we will consider a firm that has a single plant and one good that they produce.

Principles of Microeconomics


$

$

Firm

Market

S

Dmarket

QX/ut

QX(millions)

ut

In the market there are a large number of firms that produce and offer for sale a large output. Each firm’s output is small.

Dfirm

PE

PE

The demand functionfaced by the firm is perfectly elastic!

QME

The market demand and supply functions determine theequilibrium price and quantity.

A single firm produces a small portion of the market output

and must sell at the market price.

Principles of Microeconomics


$

$

Firm

S

Dfirm

PE

PE

Dmarket

QX/ut

QME

QX(millions)

ut

Market

Dfirm

AR =

PE

Average revenue

As a price taker, the firm cannot raise price above PE. Thereis no reason to sell for less. The firm can sell all it wants andcan produce at PE .

Since each unit can be sold at the price [PE ], the Dfirm is also the average revenue [AR]. PE = AR = Demand

Principles of Microeconomics


Average and marginal revenue
Average and Marginal Revenue

  • Total revenue is Price times Q: TR =PQ

  • AR is total revenue divided by Q; it is the revenue per unit of output. TR divided by Q is P, so AR = P. AR , price and the demand function are the same thing.

  • MR is the change in Total revenue associated with a change in quantity sold.

Principles of Microeconomics


$

30

PQ

TR

AR =

=

Q

Q

10

AR

Q/ut

2

1

6

AR and TR Revenue Functions:

.

TR = PQ

[cancel Q’s]

TR

= P

AR = P

Consider a purely competitive firm thatfaces a P = $5.

.

.

Since it can sell all itwants at $5/unit,AR = 5.

D =

P= 5

The demand faced by thefirm is P =f(Q), P=5 for any Q.

TR is a straight line with a slope equal to price. This istrue only in pure comp. where demand isperfectly elastic.

For Q = 1, TR = PQ = 5X1 = 5

For Q = 2, TR = PQ = 5X2 = 10

For Q = 6, TR = PQ = 5X6 = 30

Principles of Microeconomics


$

TR

30

DTR

DQ

10

D =

AR

P= 5

Q/ut

2

1

6

DTR

DQ

MR, AR and TR Revenue Functions:

TR = PQ

AR = P

MR =

The slope of TR = MR = P

Consider a purely competitive firm thatfaces a P = $5.

P = MR =

TR is a straight linewith a slope equal toprice* [in this example $5].

[When Demand is perfectly elastic!]

MR =

, MR is the slope of the TR which is the price. Because it is a purely comp. firm,each additional unit can be sold at thesame price. P = MR.

Since

{* only in pure comp}

Principles of Microeconomics


$

$

Firm

S

PH

D*market

Dmarket

QX/ut

QX(millions)

ut

Pure Competition

Market

D*firm

PH

Dfirm

PE

PE

QME

Q

An increase in the demand in the market

causes an increasein both the output and equilibrium price [to PH].

The demand function [or AR, MR] faced by the firm increasesto D*.

Principles of Microeconomics


S*

$

$

Firm

S

PH

Dmarket

QX/ut

QX(millions)

ut

Market

D*firm

PH

Dfirm

PE

PE

Q

QME

A decrease in supply in the market

causes a decreasein output and increase in equilibrium price [to PH].

The demand function [or AR] faced by the firm increasesto D*.

Principles of Microeconomics


$

$

Firm

S

S*

PE

Dmarket

D*

QX/ut

QX(millions)

ut

Pure Competition

Market

Dfirm

PE

PL

PL

PL

D*firm

D*firm

QME

An increase in supply lowers the equilibruim price in the marketand the price, AR of the firm.

A decrease in demand would have the same result in price.

Principles of Microeconomics


Short run profit maximization
Short Run Profit Maximization

  • Profits [p] = TR - TC. [p are often the objective or goal of firm.]

  • The firm will choose to produce and offer for sale all additional units of output that they can produce for a cost [MC] that is less than the additional revenue [MR] that they collect.

  • Maximum profits [or minimum loses] for a firm occur when MR = MC.

  • Ideally, the market will “signal” the costs of sellers and benefits to buyers with the market price; P = MR = MC

Principles of Microeconomics


$

TC

In pure comp, each

firm can sell entire

output at marketprice. TR is linear with

slope = P.

TR

TR =TC

Notice that the slope of TC,[MC] is the same as theslope of TR [MR] at Q*.MC = MR!

slope of TC=MC

TR = TC at Q1 & Q4. These are the levels of output where thefirm “breaks even.”

DTR

DTC

TR =TC

DQ

A firm producing at Q1would increase outputto Q* because the TCwould increase by lessthan the TR.

Q1

Q*

Q4

Q/ut

At output Q*, the vertical distance between TR and TC is the greatest. Since TR - TC = p, this is maximum p.

Principles of Microeconomics


$

TC

TR

TR =TC

slope of TC=MC

TR =TC

Q1

Q*

Q4

Q/ut

At output Q*, the vertical distance between TR and TC is the greatest.Since TR - TC = p, this is maximum p.

The firm would notincrease productionabove Q* becauseTC will increase by morethan TR. MC > MR

DTR

DQ

DTC

Since DTR [MR] isless than DTC [MC],p would fall if outputwere expanded to Q4 .

DQ

At Q* MR = MC;Maximum p.

Principles of Microeconomics


Short Run Profit Maximization

In the short run the firm is a price taker. Given the price inthe market and the fixed input(s), the firm’s only alternativesare the amount of the variable input and consequently, the output [Q].

At output levels Q1 & Q4, the firm “breaks even.” AR = ATC and TR = TC.*[Includes “normal p.]

Firm

MC

$

ATC

[* (AR)Q=TR=TC=(ATC)Q]

D = AR = MR

PE

The MC of producing theoutput between Q3 and Q*is less than the market price[ MR = P]: TR increases “faster” than TC, Maximum profits at Q*!

C3

QX/ut

Q1

Q3

Q4

Q*

The firm’s minimum cost per unit [C3 ] is at Q3. This is the maximum p perunit, not maximum p.

Principles of Microeconomics


Dp

Short Run Profit Maximization

pis TR - TC, so (PE -C3)Q3 = p.

TR is PE Q3.

At Q3 the TC is C3 Q3;

By increasing production from Q3 to Q*, the TC will increase;

The Dp is the area above MC and below MR.

TR increases;

Firm

MC

$

ATC

.

D = AR = MR

PE

p

MAXIMUM p IS WHEREMC = MR !

C3

DTR

DTC

TC

QX/ut

Q1

Q3

Q4

0

Q*

[At Q3 the cost per unit [ATC] is a minimum.]

Principles of Microeconomics


COST

Q

FC

VC

TC

AVC

ATC

MC

0

--

$10

$0

$10

--

--

1

$5

$10

$5

$15

5.00

15.

2

$3

$10

$8

$18

4.00

9.00

3

$ 1

$10

$9

$19

3.00

6.33

$3

4

$10

$12

$22

3.00

5.50

5

$6

$10

$18

$28

3.60

5.60

$9

6

$10

$27

$37

4.50

6.17

$12

7

$10

$39

$49

5.57

7.00

8

$15

$10

$54

$64

6.75

8.00

9

$19

$83

$10

$73

8.11

9.22

DTC

MC =

10

$26

DQ

10.90

9.90

$10

$99

$109

At Q = 0, the only cost isFC.

FC is a constant and remains unchanged in the short run.

Variable Cost [VC] increases as output increases.

Total cost [TC] = VC + FC

VC/Q = AVC. AVC first decreases,

then increases.

ATC = TC/Q. ATC decreases,

then increases.

MC is the change in TC [or VC] that is associated with change in output [Q].

Principles of Microeconomics


COST

Q

FC

VC

TC

AVC

ATC

MC

0

--

$10

$0

$10

--

--

1

$5

$10

$5

$15

5.00

15.

2

$3

$10

$8

$18

4.00

9.00

3

$ 1

$10

$9

$19

3.00

6.33

$3

4

$10

$12

$22

3.00

5.50

5

$6

$10

$18

$28

3.60

5.60

$9

6

$10

$27

$37

4.50

6.17

$12

7

$10

$39

$49

5.57

7.00

8

$15

$10

$54

$64

6.75

8.00

9

$19

$83

$10

$73

8.11

9.22

10

$26

10.90

9.90

$10

$99

$109

The most “efficient” use of the variable input is betweenthe 3rd and 4rth units of Q.*[min AVC and max AP are same.]

The lowest cost per unit,[min ATC] is between the 4rthand 5th units of output.*

If the objective is to MAX p, the firm will produce and offeroutput for sale so long as the additional unit cost [MC] is lessthan the price at which it can besold [MR = P in pure competition].

{*Remember MC = AVC and ATC at their minimums !}

Principles of Microeconomics


COST

p

Q

FC

VC

TC

AVC

ATC

MC

0

--

$10

$0

$10

--

--

1

$5

$10

$5

$15

5.00

15.

2

$3

$10

$8

$18

4.00

9.00

3

$ 1

$10

$9

$19

3.00

6.33

$3

4

$10

$12

$22

3.00

5.50

5

$6

$10

$18

$28

3.60

5.60

$9

6

$10

$27

$37

4.50

6.17

$12

7

$10

$39

$49

5.57

7.00

8

$15

$10

$54

$64

6.75

8.00

9

$19

$83

$10

$73

8.11

9.22

10

$26

10.90

9.90

$10

$99

$109

Given the cost structure of thefirm in our example and a market price of $13;

The most “efficient” use of thevariable does not max p.

Q = 3; TR = PQ= ($13)3 = $39TC = $19, p = TR-TC = $39-$19 = $20

$20

$30

Q = 4; TR = PQ= ($13)4 = $52TC = $22, p = TR-TC = $52-$22 = $30

$37

$41

At the least cost per unit[min ATC], p= $65-$28=$37

Q = 6; TR = PQ= ($13)6 = $78TC = $37, p = TR-TC = $78-$37 = $41

The 6th unit can be produced for a cost [MC] of $9 and sold for $13, that would add $4 to p .

Principles of Microeconomics

Should the 7th unit be produced?


COST

p

Q

FC

VC

TC

AVC

ATC

MC

0

--

$10

$0

$10

--

--

1

$5

$10

$5

$15

5.00

15.

2

$3

$10

$8

$18

4.00

9.00

3

$ 1

$10

$9

$19

3.00

6.33

$3

4

$10

$12

$22

3.00

5.50

5

$6

$10

$18

$28

3.60

5.60

$9

6

$10

$27

$37

4.50

6.17

$12

7

$10

$39

$49

5.57

7.00

8

$15

$10

$54

$64

6.75

8.00

9

$19

$83

$10

$73

8.11

9.22

10

$26

10.90

9.90

$10

$99

$109

Should the 7th unit be produced?

The MC of the 7th unit is $12, it can be sold for $13, that would increase p by $1.

<-$10>

Q = 7; TR = PQ= ($13)7 = $91TC = $49, p = TR-TC = $91-$49 = $42

<-$2>

$ 8

As long as MR [P in pure comp]exceeds MC {and AVC},produce & sell if max pis the goal.

$20

$30

$37

$41

The 8th unit will increasecosts by $15 [MC=15] andcan be sold for $13. Do youwant to produce it?

$42

$40

$34

NO !

$21

Q = 8; TR = PQ= ($13)8 = $104, TC = $64, p = TR-TC = $104-$64 = $40

Principles of Microeconomics


COST

p

Q

FC

VC

TC

AVC

ATC

MC

0

--

$10

$0

$10

--

--

1

$5

$10

$5

$15

5.00

15.

2

$3

$10

$8

$18

4.00

9.00

3

$ 1

$10

$9

$19

3.00

6.33

$3

4

$10

$12

$22

3.00

5.50

5

$6

$10

$18

$28

3.60

5.60

$9

6

$10

$27

$37

4.50

6.17

$12

7

$10

$39

$49

5.57

7.00

8

$15

$10

$54

$64

6.75

8.00

9

$19

$83

$10

$73

8.11

9.22

10

$26

10.90

9.90

$10

$99

$109

Loss minimization

Due to market conditions,the price falls to $5.

<-10>

<-10>

Profits are calculated:p = TR - TC = PQ -TC.

<- 8>

<- 4>

If the firm “shuts down”the loss is $10.

<- 2>

<- 3>

<- 7>

If the firm will produces aslong as MR = P > MC and isgreater than AVC, they canreduce their losses. Lossis $2.

<-14>

<-24>

<-38>

<-59>

Principles of Microeconomics


Short Run Loss Minimization

When the price is greater than PP , the firm can make aneconomic p . At a price, PP, the firm “breaks even.” Thiscovers a “normal profit,” [ATC > P = MR > AVC ]

MC

$

ATC

Firm

AVC

If the price falls belowPL , the firm should“shut down” to minimizelosses. [ P = MR < AVC]

PP

PL

QX/ut

Q3

0

QL

Between a price of PLand PP, the firm will lose money but can minimizelosses by producing where MC = MR between output levels QL & Q3.

Principles of Microeconomics


LRMC

ATC!

ATC6

ATC2

ATC5

ATC3

ATC*

ATC*

LRAC

LONG RUN PROFIT MAXIMIZATION

[firm in long run]

Plant ATC* is the optimal size!

$

PP

Firms with Plant size ATC*earn economic p, this attractsentry causing the market price fall.

Cmin

PM=

Q*

Q

When price falls to PM , entry ceases.

In the long run, the envelope curve represented LRAC. All costs are variable in the long run.

At a price of PP , the firm can make above normal p if they have plant size ATC3 or greater and smaller than ATC6 .

Plants ATC!, ATC2 & ATC6 have costs per unit [ATC] that are greater than the price PP. They will not earn normal p. These firms must adjust or close.

Principles of Microeconomics


LRMC

ATC!

ATC6

MC*

ATC2

ATC5

ATC3

ATC*

ATC*

LRAC

LONG RUN PROFIT MAXIMIZATION

Envelope curve:

$

.

Cmin

P=

Q*

Q

So long as P > LRACmin, firms enter [attracted by econ p] driving price down. When P < LRACmin , firms will exit the industry causing an increase in price..

Long run equilibrium [no entry or exit and price is stable] is at a price where it is equal to minimum of the LRAC. Tangent to bottom of LRAC.

In long run equilibrium:

P = AR = MR = LRAC = LRMC = ATC* = MC*

Principles of Microeconomics


LONG RUN EQUILIBRIUM:

P = AR = MR = LRAC = LRMC = ATC* = MC*

1. AR = ATC* {CONDITION FOR NORMAL p IN THE SHORT RUN.}

2. AR = LRAC {CONDITION FOR NORMAL p IN THE LONG RUN.}

3. LRAC = LRMC {CONDITION THAT INSURES MINIMUM COST PER UNIT AND OPTIMAL SIZE OR SCALE OF PLANT.}

4. ATC* = MC* {CONDITION INSURES THAT THE OPTIMAL SIZE PLANT IS OPERATED AT ITS MOST EFFICIENT LEVEL OF output.}

5. MR = MC* {CONDITION INSURES FIRM IS MAXIMIZING p IN THE SHORT RUN.}

6. P = MR = LRMC {CONDITION INSURES FIRM IS MAXIMIZING p IN THE LONG RUN RUN.}

7.P = MR = MC

[both long and short run]INSURES THAT THEFIRMS’ BEHAVIOR IS CONSISTENT WITH MAXIMUM SOCIAL WELFARE !

Principles of Microeconomics


ad