October 28, 2013

1. October 28, 2013 • Market Models Handout • Begin Chapter 8: Perfect Competition in the Short Run • Video Clip and Notes… • Chapter 7 Quizzes are graded…Reviewed tomorrow. Were you absent? Chapter8/9 Quiz: Wednesday, November 6

2. Chapter 8: Pure Competition in the Short Run

3. Industries are grouped:Four Market Models • Pure competition • Pure monopoly • Monopolistic competition • Oligopoly Oligopoly Monopolistic Competition Pure Monopoly Pure Competition Market Structure Continuum 8-3 LO1

4. Four Market Models 8-4 LO1

5. Pure Competition: Characteristics • Firms are “Price takers” (have no say in it; can only adjust to it) • Firm produces as much or little as they want at the market price. • Firms demand in perfect competition: perfectly elastic • Firms demand curve in perfect competition: horizontal line 8-5 LO2

6. Average, Total, and Marginal Revenue • Average Revenue (Revenue per unit) • AR = TR/Q = P • Total Revenue • TR = P x Q • Marginal Revenue (Extra revenue from 1 more unit) • MR = ΔTR/ΔQ 8-6 LO3

7. Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data ] ] ] ] ] ] ] ] ] ] Average, Total, and Marginal Revenue TR P QD TR MR Q 1 2 3 4 5 6 7 8 9 10 $131 131 131 131 131 131 131 131 131 131 131 $0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 131 131 131 131 131 131 131 131 D = MR = AR 8-7 LO3

8. Profit Maximization in Short Run: TR-TC Approach • Short Run Perfectly Competitive Market: Firms maximize profit by adjusting output. • Can only change variable inputs! • How do we determine level of output? TR & TC? MR & MC?” • Now we need cost data and price… 8-8 LO3

9. Profit Maximization: TR-TC Approach 8-9 LO3

10. $1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 Total Revenue and Total Cost 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 Quantity Demanded (Sold) $500 400 300 200 100 Total Economic Profit Quantity Demanded (Sold) Profit Maximization: TR–TC Approach Break-Even Point (Normal Profit) Total Revenue, (TR) Maximum Economic Profit $299 Total Cost, (TC) P=$131 Break-Even Point (Normal Profit) Total Economic Profit $299 8-10 LO3

11. October 29, 2013 • Review Chapter 7 Quiz • Continue Chapter 8 Notes: Perfect Competition: MR-MC Approach in SR • HW: Chapter 8 Practice Handout

12. Profit-Maximization- Short RunMR - MC Approach • Firms compare amounts of additional unit of output to TC (Compare MR and MC) • MR > MC- produce additional unit. • MR < MC- don’t produce *** • MR = MC Rule: Firm should stop producing additional units beyond this point. • Same as “P=MC Rule” for Perfect Competition. • We want profit per unit = P-A (Price – ATC)

13. Profit Maximization: MR-MC Approach 8-13 LO3

14. $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Profit Maximization: MR-MC Approach MR = MC MC P=$131 Economic Profit MR = P ATC Cost and Revenue AVC A=$97.78 Output 8-14 LO3

15. Loss Minimization: MR-MC Approach 8-15 LO3

16. Loss-Minimizing CaseMR = MC Approach • Now let’s assume price drops to $81. • Columns 1-5 stay same • Compare columns 5-6 • Close down after 1st unit? No!!! (Early stages MC is high and MR is low!) • For units 2-6, P > MC…but stop after 6… • Will production be profitable? No (ATC is $91.67 and P is $81 per unit- Difference of -$10.67 per unit x 6 units is -$64. (A-P) x 6 • Then why produce??? • Because this loss is less than $100 Fixed Costs which firm has to pay if it closes down in Short Run  • Firm receives enough revenue per unit ($ 81) to cover AVC @ $ 75 (+6) x 6 units = 36…$100 FC – 36 = -64  • Losses at a minimum where MR=MC 8-16 LO3

17. $200 150 Cost and Revenue 100 50 0 1 2 3 4 5 6 7 8 9 10 Output Loss-Minimizing Case MC Loss A=$91.67 ATC AVC P=$81 V = $75 MR = P 8-17 LO3

18. October 30, 2013 • Collect Homework • POP QUIZ: PERFECT COMPETITION IN THE SHORT RUN (if you were absent yesterday, you are excused-for now) Calculators OK • Finish Chapter 8 Notes (time permitting)

19. October 31, 2013 • Finish Chapter 8 Notes • Return/Review Pop Quiz from Yesterday ***Review Session: Today from 2-3 in here!*** ***Chapter 8/9 Quiz Next Wednesday*** ***Read both chapters*** HAPPY HALLOWEEN!!!

20. $200 150 Cost and Revenue 100 50 0 1 2 3 4 5 6 7 8 9 10 Output Shutdown Case  MC ATC V = $74 AVC MR = P P=$71 Short-Run Shut Down Point P < Minimum AVC $71 < $74 Firms shut down In the Short Run if MR is less than AVC at all output levels) Remember: Produce if MR=MC as long as P > AVC at that unit 8-20 LO3

21. $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Remember When we did this?Total Profit was $299 at 9 units at P: $131? MR = MC MC P=$131 Economic Profit MR = P ATC Cost and Revenue AVC A=$97.78 Output 8-21 LO3

22. $200 150 Cost and Revenue 100 50 0 1 2 3 4 5 6 7 8 9 10 Output Remember this? At P: $51, 6 units produced and loss of -$64??? MC Loss A=$91.67 ATC AVC P=$81 V = $75 MR = P 8-22 LO3

23. Marginal Cost and Short-Run Supply 8-23 LO4

24. Cost and Revenues (Dollars) Quantity Supplied Marginal Cost and Short-Run Supply MC e P5 MR5 d ATC P4 MR4 c AVC P3 MR3 b P2 MR2 a P1 MR1 Q2 Q3 Q4 Q5 0 8-24 LO4

25. Cost and Revenues (Dollars) Quantity Supplied Marginal Cost and Short-Run Supply A- Shutdown B- Owe full TFC C-Loss < TFC (minimize D- Earn normal profit E- Maximize Economic Profit S MC e P5 MR5 d ATC P4 MR4 c AVC P3 MR3 b P2 MR2 a P1 MR1 Shut-Down Point (If P is Below) Q2 Q3 Q4 Q5 0 8-25 LO4

26. 3 Production Questions 8-26 LO3

27. The Firm and the Industry: Equilibrium 8-27 LO4

28. Firm and Industry: Equilibrium • 1. $111 x 8= $888 • TC = $750 • $138 per firm • 2. $138x1,000 = $138,000 • 3. P-ATC • $111-93.75 = $17.25 S = ∑ MC’s s = MC Economic Profit ATC d $111 $111 AVC D 8000 8 If our Total Costs are $750, what is the economic profit for each firm? What is the Economic Profit for the industry as a whole? What about per-unit profit for the firms? 8-28 LO4