Perfect comp m t

On slates1. Describe a time you paid more money for a good or service you thought was better quality.2. Describe a time when you bought a good or service that was cheaper than other brands.3. Does competition make us perform better?

Competition experiment• 3 groups• 1 person• Group of 3, outside• Everyone else, silent

• Think about price & quality

I will buy one for up to $1.50Widget:

WPrice: $

Your name:

Pricing power• Some firms can choose their own price• Price makers

• Some firms must take the prices the market gives them

• Price takers

On your slate4. How much pricing power did you have during the simulation? Explain why.5. Why do consumers benefit from competition? Use a specific business examples in your answer6. Why do producers suffer from competition? 7. Why does pricing power depend on the number of firms in the market?

I Love Lucy clip

On slatesIf I’m going to the store to buy paper clips, what am I going to care most about as a consumer?

If I’m going to the store to buy a smart phone, what am I going to care most about as a

consumer?

Is this product cheap or expensive?Is there a lot of variety in this product?Is this product easy to buy?Does this product become cheaper if I buy more

quantity?Is this product easy for a firm to make?Would this product be easy for a firm to leave the

market?

Economic Competition

• 5 basic market types:– Perfect Competition– Monopoly– Monopolistic Competition– Oligopoly– Monopsony

• Measures price/nonprice competition, and product differentiation

Perfect Competition Market• Features:• Many firms• Nearly identical products• No pricing power • “price takers”• Easy to start new firm• Easy to close down firm• Perfectly informed

consumers• Costs really important

Other Examples?Salt, gasoline, paper clips

Perfect Competition examplesOn your slate

1.Write 2-3 examples of perfect competition markets that I didn’t give you in class

2.If you were in a perfectly competitive market how could you make more revenue?

3.If you were in a perfectly competitive market how could you make more profit?

4.How might economies of scale help firms in perfect competition?

On slates1. 3 examples of

industries where firms are price takers

2. 3 examples of industries where firms

are price makers

3. Which type of industry would be best to be an

entrepreneur?

review

• On slates correctly draw:

• MC, ATC, AFC, AVC

• Formally collecting papers

FIRMS IN COMPETITIVE MARKETS 13

The Revenue of a Competitive Firm

• Total revenue (TR)

• Average revenue (AR)

• Marginal revenue (MR):The change in TR from

selling one more unit.

∆TR∆QMR =

TR = P x Q

TRQAR = = P

A C T I V E L E A R N I N G 1 Calculating TR, AR, MR

14

Fill in the empty spaces of the table.

$50$105

$40$104

$103

$102

$10$101

n/a$100

TRPQ MRAR

$10

A C T I V E L E A R N I N G 1 Answers

15

Fill in the empty spaces of the table.

$50$105

$40$104

$103

$10

$10

$10

$10$102

$10$101

n/a

$30

$20

$10

$0$100

TR = P x QPQ∆TR∆Q

MR =TRQ

AR =

$10

$10

$10

$10

$10

Notice that MR = P

FIRMS IN COMPETITIVE MARKETS 16

MR = P for a Competitive Firm

• A competitive firm can keep increasing its output without affecting the market price.

• So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P.

MR = P is only true for firms in competitive markets.

FIRMS IN COMPETITIVE MARKETS 17

Profit Maximization

• What Q maximizes the firm’s profit? • To find the answer, “think at the margin.”

If increase Q by one unit,revenue rises by MR,cost rises by MC.

• If MR > MC, then increase Q to raise profit.

• If MR < MC, then reduce Q to raise profit.

Side by side graph

Cotton

Paper clip changesIndustry

FirmMetal price doubles

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