chapter 21 perfect competition n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 21. Perfect Competition PowerPoint Presentation
Download Presentation
Chapter 21. Perfect Competition

Loading in 2 Seconds...

play fullscreen
1 / 39

Chapter 21. Perfect Competition - PowerPoint PPT Presentation


  • 96 Views
  • Uploaded on

Chapter 21. Perfect Competition. What is it? Firm behavior Short run Long run. Perfect Competition. many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage. examples. wheat farming dry cleaning.

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 'Chapter 21. Perfect Competition' - tymon


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
chapter 21 perfect competition
Chapter 21. Perfect Competition
  • What is it?
  • Firm behavior
  • Short run
  • Long run
perfect competition
Perfect Competition
  • many firms, many buyers
  • identical product
  • easy entry/exit for the market
  • prices known
  • existing firms have no advantage
examples
examples
  • wheat farming
  • dry cleaning
slide4

perfectly competitive market

    • A market with many sellers and
    • buyers of a homogeneous product
    • and no barriers to entry.
  • price taker
    • A buyer or seller that takes the market price as given.
slide5

Here are the five features of a perfectly competitive market:

1 There are many sellers.

2 There are many buyers.

3 The product is homogeneous.

4 There are no barriers to market entry.

5 Both buyers and sellers are price takers.

slide6

PREVIEW OF THE FOUR MARKET STRUCTURES

  • firm-specific demand curve
    • A curve showing the relationship
    • between the price charged by a
    • specific firm and the quantity the firm can sell.
slide7

PREVIEW OF THE FOUR MARKET STRUCTURES

 FIGURE 9.1

Monopoly versus Perfect Competition

In Panel A, the demand curve facing a monopolist is the market demand curve.

In Panel B, a perfectly competitive firm takes the market price as given, so the firm-specific demand curve is horizontal. The firm can sell all it wants at the market price, but would sell nothing if it charged a higher price.

slide9

THE FIRM’S SHORT-RUN OUTPUT DECISION

  • The Total Approach: Computing Total Revenue and Total Cost
firm behavior
Firm Behavior
  • maximize profits
  • TR > TC
    • economic profits
  • TR = TC
    • normal profits
firm is price taker
Firm is price taker
  • cannot influence price
    • take price as given, choose Q
  • firm demand is perfectly elastic
    • horizontal line
  • MR = P
    • firm sells all it wants at price, P
profit maximizing
Profit maximizing
  • firm chooses Q to max profits
    • where TR - TC is largest

-- where MR = MC

  • why MR = MC?
    • MR > MC

-- output adding to profit

    • MR < MC

-- output taking away from profit

firm s demand cost curve

P

MC

Q (cans/day)

10

Firm’s demand, cost curve

D = MR = P

$8

slide15
firm is price taker
  • what if price too low to earn profit?
    • economic loss
    • will firm exit?
costs exit
costs & exit
  • firm will stay, in SR, if
    • P > AVC
  • why?
    • if firm exits, loses TFC
    • if P = AVC

-- loss from staying

= loss from exit

sr equilibrium
SR equilibrium
  • two cases
    • economic profit
    • economic loss
slide18

THE FIRM’S SHORT-RUN OUTPUT DECISION

  • The Total Approach: Computing Total Revenue and Total Cost

► FIGURE 9.2

Using the Total Approach to Choose an Output Level

Economic profit is shown by the vertical distance between the total-revenue curve and the total-cost curve.

To maximize profit, the firm chooses the quantity of output that generates the largest vertical difference between the two curves.

slide19

THE FIRM’S SHORT-RUN OUTPUT DECISION

  • The Marginal Approach

M A R G I N A L P R I N C I P L E

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost.

  • marginal revenue
    • The change in total revenue from
    • selling one more unit of output.

marginal revenue = price

To maximize profit, produce the quantity where price = marginal cost

slide20

THE FIRM’S SHORT-RUN OUTPUT DECISION

  • The Marginal Approach

 FIGURE 9.3

The Marginal Approach to Picking an Output Level

A perfectly competitive firm takes the market price as given, so the marginal benefit, or marginal revenue, equals the price.

Using the marginal principle, the typical firm will maximize profit at point a, where the $12 market price equals the marginal cost.

Economic profit equals the difference between the price and the average cost ($4.125 = $12 – $7.875) times the quantity produced (eight shirts per minute), or $33 per minute.

slide21

THE FIRM’S SHORT-RUN OUTPUT DECISION

  • Economic Profit and the Break-Even Price

economic profit = (price − average cost) × quantity produced

  • break-even price
    • The price at which economic profit is
    • zero; price equals average total cost.
slide22

THE FIRM’S SHUT-DOWN DECISION

  • Total Revenue, Variable Cost, and the Shut-Down Decision

operate if total revenue > variable cost

shut down if total revenue < variable cost

slide23

THE FIRM’S SHUT-DOWN DECISION

  • Total Revenue, Variable Cost, and the Shut-Down Decision

► FIGURE 9.4

The Shut-Down Decision and the Shut-Down Price

When the price is $4, marginal revenue equals marginal cost at four shirts (point a).

At this quantity, average cost is $7.50, so the firm loses $3.50 on each shirt, for a total loss of $14. Total revenue is $16 and the variable cost is only $13, so the firm is better off operating at a loss rather than shutting down and losing its fixed cost of $17.

The shutdown price, shown by the minimum point of the AVC curve, is $3.00.

slide24

THE FIRM’S SHUT-DOWN DECISION

  • The Shut-Down Price

operate if price > average variable cost

shut down if price < average variable cost

  • shut-down price
    • The price at which the firm is
    • indifferent between operating and
    • shutting down; equal to the minimum
    • average variable cost.
slide25

THE FIRM’S SHUT-DOWN DECISION

  • Fixed Costs and Sunk Costs
  • sunk cost
    • A cost that a firm has already paid or
    • committed to pay, so it cannot be
    • recovered.
case 1 economic profit
Case 1: economic profit
  • P = $8, Q = 10
  • ATC = $5
  • profit = ($8)(10) - ($5)(10) = $30
slide27

economic

profit

P

MC

ATC

$5

Q (cans/day)

10

D = MR = P

$8

case 2 economic loss
case 2: economic loss
  • P = $3, Q = 7
  • ATC = $5
  • profit = ($3)(7) - ($5)(7) = - $14
slide29

economic

loss

P

MC

ATC

$5

Q (cans/day)

7

D = MR = P

$3

12 3 lr equilibrium
12.3 LR Equilibrium
  • entry & exit of firms
  • firms earn normal profit
    • economic profit will be zero
why zero economic profit
why zero economic profit?
  • if economic profit > zero
    • firms enter (S shifts right)
    • price falls
    • profit falls to zero
market for syrup

P

S

S’

$8

$5

D

Q (cans/day)

100

120

market for syrup
syrup firm

zero

economic

profit

P

MC

ATC

$5

Q (cans/day)

Syrup firm

D = MR = P

slide34
if economic profit < zero
    • firms exit (S shifts left)
    • price rises
    • profit rises to zero
market for syrup1

P

S

S’’

$5

$3

D

Q (cans/day)

120

140

market for syrup
slide36

economic

loss

P

MC

ATC

$5

Q (cans/day)

7

D = MR = P

$3

syrup firm1

zero

economic

profit

P

MC

ATC

$5

Q (cans/day)

Syrup firm

D = MR = P

shifts in market demand
Shifts in market demand
  • change price in SR
    • profits or losses
  • in LR affect exit/entry
    • return to zero economic profit
summary
Summary
  • price takers
  • MR = MC determines equilibrium Q
    • SR: economic profit or loss
    • LR: economic profit is zero due

to entry/exit