View
524
Download
1
Tags:
Embed Size (px)
DESCRIPTION
Bec doms ppt on perfect competition
Citation preview
13:08
Perfect Competition
What is it? Firm behavior Short run Long run
13:08 13:08 2
Perfect Competition
many firms, many buyers identical product easy entry/exit for the market prices known existing firms have no advantage
13:08 13:08 3
examples
wheat farming dry cleaning paper cups
13:08 13:08 4
Firm Behavior
maximize profits TR > TC
economic profits
TR = TC normal profits
13:08 13:08 5
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
13:08 13:08 6
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
13:08 13:08 7
Market for syrup (all firms)P
Q (cans/day)
D
S
$8
100
13:08 13:08 8
Firm’s demand, cost curveP
Q (cans/day)
$8 D = MR = P
MC
10
13:08 13:08 9
firm is price taker what if price too low to earn profit?
economic loss will firm exit?
13:08 13:08 10
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
13:08 13:08 11
SR equilibrium
two cases economic profit economic loss
13:08 13:08 12
Case 1: economic profit
P = $8, Q = 10 ATC = $5 profit = ($8)(10) - ($5)(10) = $30
13:08 13:08 13
P
Q (cans/day)
$8 D = MR = P
MC
10
ATC
$5
economicprofit
13:08 13:08 14
case 2: economic loss
P = $3, Q = 7 ATC = $5 profit = ($3)(7) - ($5)(7) = - $14
13:08 13:08 15
P
Q (cans/day)
$3 D = MR = P
MC
7
ATC
$5
economicloss
13:08 13:08 16
12.3 LR Equilibrium
entry & exit of firms firms earn normal profit
economic profit will be zero
13:08 13:08 17
why zero economic profit?
if economic profit > zero firms enter (S shifts right) price falls profit falls to zero
13:08 13:08 18
P
Q (cans/day)
D
S
$8
100
S’
$5
120
market for syrup
13:08 13:08 19
Syrup firmP
Q (cans/day)
D = MR = P
MC
ATC
$5
zeroeconomicprofit
13:08 13:08 20
if economic profit < zero firms exit (S shifts left) price rises profit rises to zero
13:08 13:08 21
P
Q (cans/day)
D
S
$5
120
market for syrup
$3
140
S’’
13:08 13:08 22
P
Q (cans/day)
$3 D = MR = P
MC
7
ATC
$5
economicloss
13:08 13:08 23
Syrup firmP
Q (cans/day)
D = MR = P
MC
ATC
$5
zeroeconomicprofit
13:08 13:08 24
Shifts in market demand
change price in SR profits or losses
in LR affect exit/entry return to zero economic profit
13:08 13:08 25
Summary
price takers MR = MC determines equilibrium Q
SR: economic profit or loss LR: economic profit is zero due
to entry/exit