1 / 15

PURE COMPETITION

PURE COMPETITION. Chapter 11. A Perfectly Competitive Market: Assumptions. Both buyers & sellers are “price takers” Number of firms is large No barriers to entry Firms’ products are identical Complete information Firms are profit maximizers. Supply Curves and Perfect Competition.

thais
Download Presentation

PURE COMPETITION

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. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. PURECOMPETITION Chapter 11

  2. A Perfectly Competitive Market: Assumptions • Both buyers & sellers are “price takers” • Number of firms is large • No barriers to entry • Firms’ products are identical • Complete information • Firms are profit maximizers

  3. Supply Curves and Perfect Competition • Supply … • schedule of quantities of goods … • In PC market, a firm’s SC is its SRMC above AVC.

  4. Price $10 8 6 4 2 0 Quantity DCs and PC • Recall: Industry DC is  sloping. • In PC: Firm’s DC  Industry DC Market Firm Market supply Price Individual firm demand $10 A B C 8 6 4 Market Demand 2 0 10 20 30 Quantity 1,000 3,000 2,000

  5. Relationship between TR, AR & MR for PC firm •  for PC firm, MR = P • ie, P=AR=MR $7 $7 $7 $7 $7 $7 $7 $7 … … … …

  6. $385 350 Maximum profit =$81 315 280 245 Total cost, revenue 210 $130 175 140 105 70 Loss Profit 35 0 1 2 3 4 5 6 7 8 9 Quantity Profit Maximization: Max{TR–TC} MR = SlopeTR TC TR Loss MC = SlopeTC Tot. Profit =$45

  7. Quantity Produced Marginal Cost Costs Price = MR 60 $35.00 0 $28.00 35.00 1 50 20.00 35.00 2 16.00 35.00 3 40 C A 14.00 35.00 4 12.00 B 30 35.00 5 A 17.00 35.00 6 20 22.00 35.00 7 30.00 35.00 8 10 40.00 35.00 9 54.00 0 35.00 10 68.00 1 2 3 4 5 6 7 8 9 10 Quantity Marginal Cost, Marginal Revenue, and Price MC P = D = MR

  8. Finding Profit and Loss

  9. Graphing Profits: Max()  Positive  MC MC MC Price Price Price 65 65 65 60 60 60 55 55 55 ATC 50 50 50 ATC 45 45 45 40 40 40 D A P = MR Loss P = MR 35 35 35 P = MR Profit B 30 30 30 ATC AVC 25 25 25 AVC C AVC E 20 20 20 15 15 15 10 10 10 5 5 5 0 0 0 10 1 2 3 4 5 6 7 8 9 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 Quantity Quantity Quantity Profit case (>0) Loss case Zero profit case

  10. The Shutdown Decision • Once invested in Fixed (sunk) costs… • TFC > 0 …  TC … • If Produce: • TFC > 0; what about TVC? Are they >,<, or = 0? • On revenue side: TR > 0 • If Shut-down: • TC > 0, because … • Are TVC >,<, or = 0? • TR = 0 and • Shut-down rule… • Continue to operate in S/R, even if TC > TR, as long as? • TR ≥ TVC; implies what about averages? • P  AVC  operate if P ≥ AVC

  11. The Shutdown Decision 60 60 40 90

  12. Price 60 50 40 30 20 A $17.80 10 0 The Shutdown Decision MC ATC Loss P = MR AVC 4 Quantity 2 6 8

  13. Price Quantity Market Firm S MC Price D2 25  D1  20 AVC  17.80 D0 0 0 6 7 750 Quantity 5 550 650 No. of firms = 100

  14. Price 60 50 40 30 20 10 2 4 6 8 Quantity Long-Run Competitive Equilibrium MC SRATC LRATC P = MR 0

  15. Price $9 Quantity 840 Market Response to an Increase in Demand Market Firm Price MC S0SR S1SR AC B $9 B C Profit 7 7 SLR A A D1 D0 0 12 10 0 Quantity 700 1,200

More Related