Upload
yuval
View
37
Download
0
Embed Size (px)
DESCRIPTION
Pure Competition. Chapter 9. Four Market Models. Pure competition Pure monopoly Monopolistic competition Oligopoly. Imperfect Competition. Pure Competition. Monopolistic Competition. Pure Monopoly. Oligopoly. Market Structure Continuum. 9- 2. Pure Competition. - PowerPoint PPT Presentation
Citation preview
PureCompetition
Chapter 9
Four Market Models
• Pure competition• Pure monopoly• Monopolistic competition• Oligopoly
Market Structure Continuum
PureCompetition
MonopolisticCompetition Oligopoly
PureMonopoly
Imperfect Competition
9-2
Pure Competition
1. Very large numbers
2. Standardized product
3. “Price takers”
4. Free entry and exit9-3
Pure Competition• The demand schedule faced by an individual
form is perfectly elastic at the market price
• The demand curve for the market is still downward slopping
–Average revenue
–Marginal revenue
–Price
9-4
Pure Competition• Average revenue
– The individual demand schedule is also AR since the price per unit is the Revenue per unit
• Marginal revenue– In pure competition, MR=P
• TR– Slopped upwards, constant slop since
addition in TR is equal to P9-5
Firm’sDemandSchedule(AverageRevenue)
Firm’sRevenue
Data
Pure Competition
Pri
ce a
nd
Rev
enu
e
2 4 6 8 10 12
131
262
393
524
655
786
917
1048
$1179
Quantity Demanded (Sold)
D = MR = AR
TR
P QDTR MR
$131131131131131131131131131131131
0123456789
10
$0131262393524655786917
104811791310
$131131131131131131131131131131
]]]]]]]]]]
9-6
Short Run Profit Maximization
• Market price is given
• Three questions:–Should the product be produced?
–If so, in what amount?
–What economic profit (loss) will be realized?
9-7
Profit Maximization
• Two approaches
1. Total revenue and total cost approach–Produce where TR-TC is greatest
2. Marginal revenue and marginal cost approach–Produce where MR=MC
9-8
Total Revenue Total Cost Approach
(1)Total Product(Output) (Q)
(2)Total FixedCost (TFC)
(3)Total Variable
Cost (TVC)
(4)Total Cost
(TC)
(5)Total Revenue
(TR)
(6)Profit (+)
or Loss (-)
Price = $131
0123456789
10
$100100100100100100100100100100100
$090
170240300370450540650780930
$100190270340400470550640750880
1030
$0131262393524655786917
104811791310
$-100-59-8
+53+124+185+236+277+298+299+280
Now Let’s Graph The Results…Do You See Profit Maximization?9-9
10 2 3 4 5 6 7 8 9 10 11 1213 14
10 2 3 4 5 6 7 8 9 10 11 1213 14
$180017001600150014001300120011001000
900800700600500400300200100
$500400300200100
To
tal
Re
ven
ue
and
To
tal
Co
stT
ota
l E
con
om
icP
rofi
t
Quantity Demanded (Sold)
Quantity Demanded (Sold)
Total Revenue, (TR)
Break-Even Point(Normal Profit)
Break-Even Point(Normal Profit)
MaximumEconomic
Profit$299
Total EconomicProfit
$299
P=$131
Total Cost,(TC)
Total Revenue Total Cost Approach
9-10
Marginal Revenue Marginal Cost Approach
(1)Total
Product(Output)
(2)Average
FixedCost(AFC)
(3)AverageVariable
Cost(AVC)
(4)Average
TotalCost(ATC)
(6)MarginalRevenue
(MR)
(7)Profit (+)
or Loss (-)
0123456789
10
$100.0050.0033.3325.0020.0016.6714.2912.5011.1110.00
$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
$131131131131131131131131131131
$-100-59-8
+53+124+185+236+277+298+299+280
No Surprise - Now Let’s Graph It…Do You See Profit Maximization Now?
(5)Marginal
Cost(MC)
$90807060708090
110130150
9-11
Co
st a
nd
Rev
enu
e$200
150
100
50
01 2 3 4 5 6 7 8 9 10
Output
Economic Profit MR = P
MCMR = MC
AVC
ATC
P=$131
A=$97.78
Marginal Revenue Marginal Cost Approach
9-12
Short Run Profit Maximization
• Produce where MR (=P) = MC
• Suffer loss, still produce?
• Yes if loss is less than fixed cost–Cover variable cost
• Shut down if loss greater than fixed cost
• Produce if P > min AVC9-13
Lower the Price to $81 andObserve the Results!
Co
st a
nd
Rev
enu
e$200
150
100
50
01 2 3 4 5 6 7 8 9 10
Output
Loss
Short Run Loss Minimizing Case
MR = P
MC
AVCATC
P=$81
A=$91.67
V = $75
9-14
Lower the Price Further to $71 and Observe the Results!
Co
st a
nd
Rev
enu
e$200
150
100
50
01 2 3 4 5 6 7 8 9 10
Output
Short Run Shut Down Case
MR = P
MC
AVC
ATC
P=$71
Short-Run Shut Down Point
P < Minimum AVC$71 < $74
V = $74
9-15
Short-Run Supply Curve
Continuing the Same Example…
Supply Schedule of a Competitive Firm
PriceQuantitySupplied
Maximum Profit (+)or Minimum Loss (-)
$151131111
91817161
10987600
$+480+299+138
-3-64
-100-100
The schedule shows the quantity a firmwill produce at a variety of prices
9-16
Short-Run Supply Curve
Firms produce where MR=MC
P1
0
Co
st a
nd
Rev
enu
es (
Do
llars
)
Quantity Supplied
MR1
P2 MR2
P3 MR3
P4 MR4
P5 MR5
MC
AVC
ATC
Q2 Q3 Q4 Q5
This Price is Below AVCAnd Will Not Be Produced
ab
c
d
e
9-17
Short-Run Supply Curve
P1
0
Co
st a
nd
Rev
enu
es (
Do
llars
)
Quantity Supplied
MR1
P2 MR2
P3 MR3
P4 MR4
P5 MR5
MC
AVC
ATC
Q2 Q3 Q4 Q5
ab
c
d
e
MC Above AVC Becomesthe Short-Run Supply Curve S
Examine the MC for the Competitive Firm
Break-even(Normal Profit) Point
Shut-Down Point (If P is Below)
Firms produce where MR=MC
9-18
Firm and Industry Supply
• Changes in firm supply–Shifts in marginal cost
–Input price or technology
• The industry (total) supply curve–Sum of individual supply
• Industry supply and demand–Determine market price
9-19
Single Firm Industryp P
p P0 0
Firm and Industry Supply
EconomicProfit
d
ATC
AVC
s = MC
$111 $111
D
S = ∑ MC’s
8 8000
Competitive firm must take the price that isEstablished by industry supply and demand
9-20
Long Run Profit Maximization
• Assumptions–Entry and exit only–Identical costs–Constant-cost industry
• Goal of the analysis–In the long run, P = min ATC–Entry eliminates profits–Exit eliminates losses
9-21
Single Firm Industryp P
p P0 0100 90,00080,000 100,000
Entry Eliminates Profits
ATC
MR
MC
$60
50
40
D1
S1
An increase in demand temporarily raises priceHigher prices draw in new competitorsIncreased supply returns price to equilibrium
D2
$60
50
40
S2
9-22
Single Firm Industryp P
p P0 0100 90,00080,000 100,000
Exit Eliminates Losses
ATC
MR
MC
$60
50
40
D3
S3
A decrease in demand temporarily lowers priceLower prices drive away some competitorsDecreased supply returns price to equilibrium
D1
$60
50
40
S1
9-23
Long Run Supply
• Constant cost industry–Entry/exit does not affect LR ATC–Constant resource price–Special case
• Increasing cost industry–Most industries–LR ATC increases with expansion–Specialized resources
• Decreasing cost industry9-24
P
0 Q
Long-Run Supply Curve
Constant-Cost Industry
90,000 100,000 110,000Q3 Q1 Q2
$50
P1
P2
P3
SZ1 Z2Z3
D3 D1 D2
9-25
P
0 Q
Long-Run Supply Curve
Increasing-Cost Industry
90,000 100,000 110,000Q3 Q1 Q2
$50P1
S
Y1
Y2
Y3
D3
D1
D2
$40
$55P2
P3
How would a decreasing-cost industry look?9-26
Pure Competition and Efficiency
• Productive efficiencyP = minimum ATC
• Allocative efficiencyP = MC
• Maximum consumer and producer surplus
• Dynamic adjustments• “Invisible Hand” revisited
9-27
Single Firm MarketP
rice
Pri
ce
Quantity Quantity
0 0
Long-Run Equilibrium
P MR
D
S
QeQf
ATC
Productive Efficiency: Price = minimum ATCAllocative Efficiency: Price = MCPure competition has both in
its long-run equilibrium
MCP=MC=MinimumATC (Normal Profit)
P
9-28