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# Competitive Markets - PowerPoint PPT Presentation

Competitive Markets. Structure. Fragmented Undifferentiated Products : Homogeneous Perfect Information about Price Equal Access to Resources. Three Implication. Price Takers Law of one Price Free Entry & Free Exit. Profit Maximization. Profit Maximization Condition. TR. TR,TC. TC.

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## PowerPoint Slideshow about 'Competitive Markets' - maren

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### Competitive Markets

• Fragmented

• Undifferentiated Products : Homogeneous

• Price Takers

• Law of one Price

• Free Entry & Free Exit

Profit Maximization Condition

TR,TC

TC

Profit

0

Q

MC

MR = P

0

Q

MC > MR

MC < MR

MC = MR

MC > MR

Industry

Price

Price

AR = P = MR

D

Q

Q

MC

AC

A

MR = P

P1

Excess Profit

AVC

C

B

Q

0

Q

AC

MC

A

MR = P

P1

AVC

C

Q

0

Q

MC

AC

B

AVC

C

Loss

P1

A

MR = P

Q

0

Q

MC

AC

B

C

AVC

Loss

A

MR = P

P1

Q

0

Q

MC

AC

B

C

AVC

Loss

MR = P

P1

A

Q

0

Q

MC

AC

P1

AVC

P2

P3

P4

Shut Down Point

Q

0

MC

AC

P1

AVC

P2

P3

P4

Shut Down Point

Q

0

Firm’s Supply

The Firm’s short run total cost curve is

STC = 100 +20Q + Q2.

The short run Marginal cost curve is

SMC = 20 + 2Q

If SFC = 100, while SVC = 20Q + Q2

Find AVC , Minimum level of average variable cost, supply curve

TFC = SFC + NSFC

MC

AC

ANSC

AVC

B

C

P1

Minimum ANSC = P

A

Q

0

Q

The Firm’s short run total cost curve is

STC = 100 +20Q + Q2.

The short run Marginal cost curve is

SMC = 20 + 2Q

If SFC = 36, while NSFC = 64

Find ANSC , Minimum level of average non sunk cost, supply curve

Market

P

P

p

Q

Q

Q1

Q2

Q1+Q2

Firm Supply and Market Supply

P

S

SAC

P*

D

Q*

Q

D(P*)

Q

Short Run perfectly Competitive equilibrium

The Market consists of 300 identical firms, and the market demand curve is given by

D(P) = 60 – P.

Each firm has a short run cost curve

STC = 0.1 + 150Q2 , all fixed cost are sunk.

The corresponding short run marginal cost curve

SMC = 300Q.

The corresponding average variable cost curve is

AVC = 150Q.

You should verify that the minimum level of AVC is 0. Thus, a firm will continue to produce as large as price is positive

Find Short run equilibrium in market, at equilibrium, do the firm make positive profit?

P demand curve is given by

P

S

SAC

S’

P1

P2

D

Q2f

Q1f

Q

Q

Q1

Q2

Comparative Statics in short run

Increase in the number of firm

Price demand curve is given by

MC2

SAC2

LMC

MC1

P1

SAC1

LAC

Quantity

Q1

Q2

Price demand curve is given by

LMC

LAC

P1

P2

P*

Quantity

Q*

Q2

Q1

Long Run Supply Curve

Price demand curve is given by

LMC

LAC

P1

P2

P*

Quantity

Q*

Q2

Q1

Long Run Supply Curve

Free Entry and Long Run demand curve is given by

1. Long Run Profit is maximized with respect to output and plant size.

P* = MC ( Q* )

2. Economic profit is Zero.

P* = AC ( Q* )

P demand curve is given by

P

LMC

SMC

S

SAC

LAC

P*

D

D(P*) = n*Q*

Q*

Q

Q

Free Entry and Long Run

3. Demand equals Supply.

D( P* ) = n Q*

In this market, each firm and potential entrant has a long – run average cost

AC( Q ) = 40 – Q – 0.01Q2.

And a corresponding long run marginal cost curve

MC( Q ) = 40 – 2Q + 0.03Q2.

Where Q is thousand units per year. The Market demand curve is

D( P ) = 25,000 – 1,000P,

Where D(P) is also measured in thousand units. Find the long run equilibrium price, quantity per firm, and number of firms.

P – run average cost

P

LMC

S

SAC

S’

LAC

A

P2

B

P1

D’

D

Q

Q

Q1f

Q2f

Q1

Q2

Long Run Market Supply Curve

P – run average cost

P

LMC

S

S’

LAC

A

P2

SL

B

P1

D’

D

Q

Q

Q1f

Q2f

Q1

Q2

Industry Long Run Supply Curve

Constant Cost

Increasing Cost – run average cost

P

P

LMC2

S

LMC1

LAC2

S’

LAC1

P2

P3

SL

P1

D’

D

Q2

Q

Q

Q1f

Q2f

Q1

Industry Long Run Supply Curve

Problem 1 – run average cost

The bolt industry currently consists of 20 producers, all of whom operate with identical short run total cost function

STC ( Q ) = 16 + Q2

Where Q is the annual output. The corresponding short run marginal cost curve is

SMC ( Q ) = 2Q

The market demand for the bolts is

D ( P ) = 110 – P

Where P is the market price

a ) Assuming that all of the firm fixed cost is sunk, what is the firm’s short run supply curve?

b ) What is the short run market supply curve?

c ) Determine the short run equilibrium price and quantity in the industry.

Problem 2 is the firm’s short run supply curve?

Propylene is used to make plastic. The propylene industry is perfectly competitive, and each producer has a long run marginal cost function given by

MC ( Q ) = 40 – 12Q + Q2

The corresponding long run average cost function is

AC ( Q ) = 40 – 6Q + (1/3)Q2

The market demand curve for propylene is

D ( P ) = 2200 – 100P

a ) What is long run equilibrium price in the industry? is the firm’s short run supply curve?

b ) At this price, how much would an individual firm produce?

c ) How many firms are in the propylene market in long run competitive equilibrium.

d ) Suppose the demand curve shifted so that it is now D ( P ) = A – 100P. How large would A have to be so that in the new long run competitive equilibrium, the number of propylene firms was twice what it was in the initial long run equilibrium?.

Problem 3 is the firm’s short run supply curve?

The long run total cost function for producers of mineral water is

TC ( Q ) = cQ

Where Q is the output of individual firm expressed as thousand liters per year. The market demand curve is

D ( P ) = a – bP

Find the long run equilibrium price and quantity in term of a, b, c, . Can you determine the equilibrium number of firms? If so, what is it? Why not?