Perfect Competition
Econ 10Holmes
Road MapCosts
Graphs
Definition
Tables
DefinitionPerfect Competition is the Industry Structure characterized by •many, many firms•each firm has no independent effect on the market price (price taker)•homogeneous goods•perfectly elastic demand (for a particular firm’s good)
Common examples:produce stand
The demand for a particular firm’s good
Market(Tomatoes) S
D
d
Firm(Farmer Joe’s Tomatoes)
P$
Road MapCosts
Graphs
Definition
Tables
Perfect Competition:Generic Cost Curves
Q
$
AVCATC
MC
Perfect Competition:Condition I: P>ATC
Q
$
AVCATC
MCD
Wheredoes P=MC?
Perfect Competition:Condition I: P>ATC
Q
$
AVCATC
MCD
Perfect Competition:Condition I: P>ATC
Q
$
AVCATC
MCD
TR
TC
PROFIT
P>ATC==> ProfitP>AVC==> Stay Open
Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVCATC
MC
DWheredoesP=MC?
Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVCATC
MC
D
Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVCATC
MC
D
LOSS
TVC
TFCTC
P<ATC==> LossP>AVC==> Stay Open
Perfect Competition:Condition III: P<AVC
Q
$
AVCATC
MC
D
WheredoesP=MC?
Perfect Competition:Condition III: P<AVC
Q
$
AVCATC
MC
D
WheredoesP=MC?
Perfect Competition:Condition III: P<AVC
Q
$
AVCATC
MC
D
TC
TVC
TFCLOSS if firmproduces
P<ATC==> LossP<AVC==> Better to close
Two ways to figure “I should shut down”
LOSSTFC )( TCTRTFC
TRTCTFC
TRTVCTFCTFC
TVCTR
Continue to operate if….
Road MapCosts
Graphs
Definition
Tables
TablesRemember when we did all those cost tables?
MP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15Now, in order to determine where the firm should operate, need to know... P=$4Where does P=MC?A: Q=17Profit = TR- TC = $4 * 17 - 63 = 68-63 = 5Firm should (obviously) not shut down.
TablesCondition I
MP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15, P=$4Note that (indeed, just as we claimed) profit is maximized at P=MC. TR TC Profit
16 27 -1140 39 156 51 568 63 576 75 1
Why is here better than here?
Answer: normal profit/opp cost
Perfect Competition:Condition I: P>ATC
Q
$
AVCATC
MCD
TR
TC
PROFIT
P>ATC==> ProfitP>AVC==> Stay Open
TablesCondition II
MP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15, P = $3
Profit is maximized at the largest Q where P=MC.TR TC Profit12 27 -1530 39 -942 51 -951 63 -1257 75 -18
Compare here and here (P=MC at both)
Suppose P = $3
P=MC at Q=14==> profit = 42 - 51 = -9 (loss of 9)but stay open (9<15)
Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVCATC
MC
D
TC
TR
LOSS
P<ATC==> LossP>AVC==> Stay Open
TablesCondition IIIMP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15, P = $2
Suppose P = $2
P=MC at Q=10==> profit = 20 - 39 = -19 (loss of 19)Now should close (19>15)
Note that1. Loss at Q>0 where P=MC > TFC2. TR<TVC
Perfect Competition:Condition III: P<AVC
Q
$
AVCATC
MC
D
TC
TR
LOSS
P<ATC==> LossP<AVC==> Better to close
Road MapCosts
Graphs
Definition
Tables
Your TurnN Q1 32 73 104 125 13
Wage = $24, TFC = $60, P =$12
What is best Q>0? Profit/loss at this Q? Should firm shut down? Sketch the graph.
N Q1 52 153 304 405 45
Wage = $30, TFC=$60,P=$3
What if TFC = $110? What does this do to the best Q>0 and the shutdown decision?
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