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CHAPTER 5  MARKET STRUCTURE: PERFECT COMPETITION
Chapter Outline ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Perfect Competition ,[object Object],[object Object],[object Object]
5.1 Characteristic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
5.1 Characteristic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Firm Industry 100 Figure: Market Equilibrium and Firm’s Demand Curve Price taker d $4 Output  (bushels) Price $ per  bushel D $4 S Price $ per  bushel Output  (millions  of bushels)
[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Profit-Maximizing Level of Output ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object]
5.2 Short-run Decision:  Profit Maximization  ,[object Object],Π maximize when  MR = MC = P  (one price for every level of output & the whole market/industry ) »  Profit maximization condition Firm will produce up to the point where the price of its output is just equal to short-run MC (P=MC)
Total Revenue, Average Revenue and Marginal Revenue for a competitive firm Quantity sold Price  (RM) TR (RM) AR (RM) MR  (RM) 0 20 0 20 20 1 20 20 20 20 2 20 40 20 20 3 20 60 20 20 4 20 80 20 20 5 20 100 20 20 6 20 120 20 20 7 20 140 20 20 8 20 160 20 20
Graphical Illustration of TR, AR and MR for a Competitive Firm TR AR = MR=D 1  2  3  4  5  6  7  8  9  10 160 140 120 100 80 60 40 20 0 Price and revenue Quantity Demanded (sold)
Profit maximization –  Numerical example  Quantity TR (RM) TC (RM) PROFIT (RM) MR (RM) MC (RM) 0 0 10 -10 - - 1 20 14 6 20 4 2 40 22 18 20 8 3 60 34 26 20 12 4 80 50 30 20 16 5 100 70 30 20 20 6 120 94 26 20 24 7 140 122 18 20 28 8 160 154 6 20 32
160 140 120 100 80 60 40 20 0 Total revenue and total cost Total Revenue Total Cost Maximum Economic Profits RM30 Break-Even Point (Normal Profit) Break-Even Point (Normal Profit) 1  2  3  4  5  6  7  8 1. TOTAL REVENUE-TOTAL COST APPROACH
TOTAL REVENUE- TOTAL COST APPROACH ,[object Object],[object Object],[object Object]
2. MARGINAL REVENUE- MARGINAL COST APPROACH A q 1  : MR > MC;  ↑ output q 2 : MR < MC;  ↓ output q * : MR = MC  Profit is maximized where MR = MC Profit increases until it is maxed at q* q 2 10 20 30 40 Price 50 MC 0 1 2 3 4 5 6 7 8 9 10 11 Output q * AR=MR=P q 1 Lost Profit for q 2  > q* Lost Profit for q 1  < q*
Choosing Output:  Short Run ,[object Object],[object Object],[object Object],[object Object]
The Relationship Between MR and MC: ,[object Object],[object Object],[object Object],MR > MC MR < MC MR = MC
Short Run Equilibrium ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Supernormal Profit (Economic Profit) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cost and Revenue 1  2  3  4  5  6  7  8  9  10  MC MR=AR=P ATC Economic Profit RM5 RM3 Supernormal Profit/ Economic Profit Minimum point of ATC
Breakeven/ Normal Profit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cost and Revenue 1  2  3  4  5  6  7  8  9  10  MC MR=AR ATC RM5 Breakeven/ Normal Profit Minimum point of ATC
Economic losses/  Subnormal profit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cost and Revenue 1  2  3  4  5  6  7  8  9  10  MC MR=AR ATC Economic Loss RM5 RM7 Economic losses/ Subnormal profit
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cost and Revenue 1  2  3  4  5  6  7  8  9  10  MC MR=AR AVC ATC Economic Loss P ATC Subnormal Profit (ATC>P>AVC)):  (i) Keep Operating AVC
Cost and Revenue 1  2  3  4  5  6  7  8  9  10  MC MR=AR AVC ATC Economic Loss P ATC Subnormal Profits (ATC>P<AVC): (ii)  Shutdown AVC
Shutting Down in the Short Run ,[object Object],[object Object],[object Object]
Summary:  Firm Decisions in the Long Run &  Short Run ,[object Object],[object Object],SR CONDITION SR DECISION LR DECISION Profits TR > TC operate Expand + new firms enter  Losses 1. With operating profit operate Contract +  firms exit ( TR      TVC ) (losses < FC) 2. With operating losses shut down: Contract +  firms exit ( TR  <  TVC ) losses = FC
Short Run Supply Curve ,[object Object],[object Object]
Cost and Revenue, (dollars) MC AVC ATC Quantity Supplied P 1 P 2 P 3 P 4 P 5 Q 2 Q 3 Q 4 Q 5 Marginal Cost & Short-Run Supply Do not Produce  Below AVC(< P 2 ) Normal Profit Shut down point Subnormal profit Supernormal profit
Cost and Revenue, (dollars) MR 1 Quantity Supplied MR 2 MR 3 MR 4 MR 5 P 1 P 2 P 3 P 4 P 5 Q 2 Q 3 Q 4 Q 5 Marginal Cost & Short-Run Supply Short-Run Supply Curve Supply No Production Below AVC
Short-Run Supply Curve ,[object Object],[object Object]
5.4 Long Run Adjustment ,[object Object],[object Object],[object Object],[object Object],[object Object]
Profit maximization in the LR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Try this!!
Profit Maximization in the LR ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Try this!!
5.5 External Changes:  Consumer Preference  &  Technology ,[object Object],[object Object],[object Object]
(1) Changing Preference   Increase in demand Firm Industry
[object Object],[object Object],[object Object],[object Object],[object Object]
S 1 MC ATC MR D 1 Before Increase in Demand P Q q1 P Q Q1 Industry Firm (price taker) P1 P1
DD increases – DD curve shift left – P ↑  - Q ↑  - supernormal profit – new firms enter MR D 1 MC ATC D 2 Economic Profits S 1 MR 1 P Q q1 q2 P Q Q1 Q2 Industry Firm (price taker) P2 P1 P2 P1
New entry – SS  ↑ - Q↑ - P↓ - (P = ATC)  normal profit   MR D 1 MC ATC D 2 Zero Economic Profits S 1 S 2 q2 Q1Q2Q3  IMPORTANT!! P Q q1 P Q Industry Firm (price taker) P2 P1 P2 P1
Changing Preference : Decrease in demand Industry Firm
[object Object],[object Object],[object Object],[object Object],[object Object]
Before decrease in demand: S 1 MC ATC D 1 MR P Q q1 P Q Q1 Industry Firm (price taker) P1 P1
MR D 1 MC ATC D 2 Economic Losses S 1 q2 DD decreases – DD curve shift right – P ↓  - Q ↓  - subnormal profit – existing firms exit P Q q1 P Q Q2Q1 Industry Firm (price taker) P1 P2 P1 P2
MR D 1 MC ATC D 2 Zero Economic Profits S 1 S 3 Q3 q2 Existing firms exit – SS  ↓ - Q↓ - P↑: (P = ATC) normal profit   IMPORTANT!! P Q q1 P Q Q2 Q1 Industry Firm (price taker) $60 50 40 $60 50 40
(2)   Advancing Technology: Technology Improvements   (a)  Adopt new technology (b)  Old technology firm  Economic loss Positive economic profit  New firms entry  SS up, P down  Profit reducing Produce at lower cost Exit Adopt new technology SS down, P up Zero economic profit
5.6 Efficiency of Perfect Competition  ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Summary:  Firm Decisions in the Long Run &  Short Run ,[object Object],[object Object],SR CONDITION SR DECISION LR DECISION Profits TR > TC operate Expand + new firms enter  Losses 1. With operating profit operate Contract +  firms exit ( TR      TVC ) (losses < FC) 2. With operating losses shut down: Contract +  firms exit ( TR  <  TVC ) losses = FC
LETS DO IT
Output (unit) Total cost  (RM) Variable cost  (RM) 1 15 10 2 21 16 3 28 23 4 37 32 5 50 45 6 68 63
[object Object],[object Object],[object Object],QUESTIONS:
THANK YOU

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Chap5

  • 1. CHAPTER 5 MARKET STRUCTURE: PERFECT COMPETITION
  • 2.
  • 3.
  • 4.
  • 5.
  • 6. Firm Industry 100 Figure: Market Equilibrium and Firm’s Demand Curve Price taker d $4 Output (bushels) Price $ per bushel D $4 S Price $ per bushel Output (millions of bushels)
  • 7.
  • 8.
  • 9.
  • 10.
  • 11.
  • 12. Total Revenue, Average Revenue and Marginal Revenue for a competitive firm Quantity sold Price (RM) TR (RM) AR (RM) MR (RM) 0 20 0 20 20 1 20 20 20 20 2 20 40 20 20 3 20 60 20 20 4 20 80 20 20 5 20 100 20 20 6 20 120 20 20 7 20 140 20 20 8 20 160 20 20
  • 13. Graphical Illustration of TR, AR and MR for a Competitive Firm TR AR = MR=D 1 2 3 4 5 6 7 8 9 10 160 140 120 100 80 60 40 20 0 Price and revenue Quantity Demanded (sold)
  • 14. Profit maximization – Numerical example Quantity TR (RM) TC (RM) PROFIT (RM) MR (RM) MC (RM) 0 0 10 -10 - - 1 20 14 6 20 4 2 40 22 18 20 8 3 60 34 26 20 12 4 80 50 30 20 16 5 100 70 30 20 20 6 120 94 26 20 24 7 140 122 18 20 28 8 160 154 6 20 32
  • 15. 160 140 120 100 80 60 40 20 0 Total revenue and total cost Total Revenue Total Cost Maximum Economic Profits RM30 Break-Even Point (Normal Profit) Break-Even Point (Normal Profit) 1 2 3 4 5 6 7 8 1. TOTAL REVENUE-TOTAL COST APPROACH
  • 16.
  • 17. 2. MARGINAL REVENUE- MARGINAL COST APPROACH A q 1 : MR > MC; ↑ output q 2 : MR < MC; ↓ output q * : MR = MC Profit is maximized where MR = MC Profit increases until it is maxed at q* q 2 10 20 30 40 Price 50 MC 0 1 2 3 4 5 6 7 8 9 10 11 Output q * AR=MR=P q 1 Lost Profit for q 2 > q* Lost Profit for q 1 < q*
  • 18.
  • 19.
  • 20.
  • 21.
  • 22. Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR=P ATC Economic Profit RM5 RM3 Supernormal Profit/ Economic Profit Minimum point of ATC
  • 23.
  • 24. Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR ATC RM5 Breakeven/ Normal Profit Minimum point of ATC
  • 25.
  • 26. Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR ATC Economic Loss RM5 RM7 Economic losses/ Subnormal profit
  • 27.
  • 28. Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR AVC ATC Economic Loss P ATC Subnormal Profit (ATC>P>AVC)): (i) Keep Operating AVC
  • 29. Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR=AR AVC ATC Economic Loss P ATC Subnormal Profits (ATC>P<AVC): (ii) Shutdown AVC
  • 30.
  • 31.
  • 32.
  • 33. Cost and Revenue, (dollars) MC AVC ATC Quantity Supplied P 1 P 2 P 3 P 4 P 5 Q 2 Q 3 Q 4 Q 5 Marginal Cost & Short-Run Supply Do not Produce Below AVC(< P 2 ) Normal Profit Shut down point Subnormal profit Supernormal profit
  • 34. Cost and Revenue, (dollars) MR 1 Quantity Supplied MR 2 MR 3 MR 4 MR 5 P 1 P 2 P 3 P 4 P 5 Q 2 Q 3 Q 4 Q 5 Marginal Cost & Short-Run Supply Short-Run Supply Curve Supply No Production Below AVC
  • 35.
  • 36.
  • 37.
  • 39.
  • 41.
  • 42. (1) Changing Preference Increase in demand Firm Industry
  • 43.
  • 44. S 1 MC ATC MR D 1 Before Increase in Demand P Q q1 P Q Q1 Industry Firm (price taker) P1 P1
  • 45. DD increases – DD curve shift left – P ↑ - Q ↑ - supernormal profit – new firms enter MR D 1 MC ATC D 2 Economic Profits S 1 MR 1 P Q q1 q2 P Q Q1 Q2 Industry Firm (price taker) P2 P1 P2 P1
  • 46. New entry – SS ↑ - Q↑ - P↓ - (P = ATC) normal profit MR D 1 MC ATC D 2 Zero Economic Profits S 1 S 2 q2 Q1Q2Q3 IMPORTANT!! P Q q1 P Q Industry Firm (price taker) P2 P1 P2 P1
  • 47. Changing Preference : Decrease in demand Industry Firm
  • 48.
  • 49. Before decrease in demand: S 1 MC ATC D 1 MR P Q q1 P Q Q1 Industry Firm (price taker) P1 P1
  • 50. MR D 1 MC ATC D 2 Economic Losses S 1 q2 DD decreases – DD curve shift right – P ↓ - Q ↓ - subnormal profit – existing firms exit P Q q1 P Q Q2Q1 Industry Firm (price taker) P1 P2 P1 P2
  • 51. MR D 1 MC ATC D 2 Zero Economic Profits S 1 S 3 Q3 q2 Existing firms exit – SS ↓ - Q↓ - P↑: (P = ATC) normal profit IMPORTANT!! P Q q1 P Q Q2 Q1 Industry Firm (price taker) $60 50 40 $60 50 40
  • 52. (2) Advancing Technology: Technology Improvements (a) Adopt new technology (b) Old technology firm Economic loss Positive economic profit New firms entry SS up, P down Profit reducing Produce at lower cost Exit Adopt new technology SS down, P up Zero economic profit
  • 53.
  • 54.
  • 55.
  • 56.
  • 57.
  • 59. Output (unit) Total cost (RM) Variable cost (RM) 1 15 10 2 21 16 3 28 23 4 37 32 5 50 45 6 68 63
  • 60.

Notas del editor

  1. 5
  2. 8
  3. 36
  4. 28