ECON 160

1. ECON 160 Week 10 The Firm in Competition (Chapter 13)

2. Review • Production is organized within Firms to take advantage of the benefits of Teamwork & Specialization. • Owners receive Profits to monitor their behavior to Maximize TR and Minimize TC. • Profits (Π) is increased if MR > MC. • What rate of output, Maximizes Π ?

3. Alternative Rates of Production

4. Marginal Product • At first: Teamwork and specialization  Increasing marginal product as you add workers. • Law of Diminishing Returns: As you add more of one input to a fixed amount of other inputs, Marginal product declines.

5. Marginal Product Marg. Product Workers

6. Marginal Cost of Production

7. Marginal Cost $ Marginal Cost Qtys/Day

8. Marginal Cost $ COST Marginal Cost Quantity of Output / Time period

9. Average Cost of Production

10. Average Cost $ Cost Qtys/Day

11. Average Total Cost $ COST Average Total Cost Quantity of Output

12. Average Total Cost & Marginal Cost $ COST Marginal Cost Average Total Cost Quantity of Output / Time

13. Economies of Scale $ COST Average Total Cost Minimum ATC Dis-Economies of Scale Economies of Scale Quantity of Output

14. Demand Facing the Firm $P $P $P $P D1 D3 D4 D2 Q Q Q Q Increasing degrees of Competition   Increasing degrees of Market Power 

15. Alternative Market Structures The Most Competitive Case: The Price Taker Firm

16. Market and Firm Demand $P $P Firm Market D S Pe Pe D S D Q/T Qe Q/T

17. Price Taker Firm $ P MC Price = Marginal Revenue Pe D= MR Profit Maximizing Rate of output Qe Q/T

18. Assumptions for a Price Taker • Large number of buyers & sellers • Homogeneous products • Low information costs to buyers & sellers • Low costs of entry and exit of firms

19. Total Revenue = Pe x Qe $ P MC Pe D Total Revenue Qe Q/T

20. Total Cost = AC x Q $ P MC AC Pe D AC at Qe Total Cost Qe Q/T

21. Profit = TR - TC $ P MC AC Pe D Q Q/T

22. Market Response to Profits $P D So S’ Pe P’ D So Qx/T Qe Q’

23. Price Taker Firm: Zero Profits $ P MC ATC D Pe’ D’= MR Qe Q/T

24. Price Taker Firm: Loss $ P ATC MC Loss Pe D= MR Qe Q/T

25. Market Response to Losses $P D S’ So P’ Po D S’ Qx/T Q’ Qo

26. Price Taker Firm: Zero Profits $ P MC ATC Pe’ D’= MR Po D Qe Q/T

27. Profits occur if (P=MC) > AC $ P MC AC Pe D= MR Qe Q/T

28. Price Taker Firm: Loss but stay in business Short-Run $ P MC ATC Loss AVC AC Pc TFC Demand Shut down Loss Total Revenue TVC Qc Q/T

29. Short Run Firm Supply: MC > AVC MC $ P SR Firm Supply Profit Range AC Min. Loss Range AVC Q/T

30. Long-Run Industry Equilibrium $P $P Firm Market MC D S ATC Pe Pe D S D Q/T Qe Qe Q/T

31. Implications of Price-Taker Industry • Demand for the firm is horizontal at the market price • Efficiency: Price equals marginal cost of production • Competition drives price to equal Average cost • Economic profits only exist in the short-run.