Transcript Document

Chapter 7
slide 1
PERFECT COMPETITION
Market Structure is
Important for Two Reasons
It influences firm Behavior & Profitability
It Influences Economic Performance
Which Markets Perform Well
Which should be Regulated
We divide markets according to:
Number of Competitors
Barriers to Entry
Types of Products
Barriers to Entry
Firms High Medium None
1
Monopoly
Few
Oligopoly
Many
Perfect
Competition
BASICS OF SUPPLY & DEMAND
7.2
The competitive equilibrium occurs
at P = $25 and Q = 8 thousand shoes.
The increase (shift) in demand results in
a higher price and a greater output.
Price
Supply
Demand
$25
0
4
8
12
Pairs of Shoes
16
SUPPLY & DEMAND
7.3
The fall in the marginal cost of production
causes a favorable shift in supply and
a lower price accompanied by greater output.
Price
Supply
Demand
$25
0
4
8
12
Pairs of Shoes
16
PERFECT COMPETITION
7.4
Firm Behavior
Each firm is a price taker (MR = P).
Each firm sets its QF such that P = MC.
In long-run equilibrium,
price is bid down until:
P = MR = MC = ACMIN
Revenue
& Cost
per unit
MC
AC
P = $8
P = $6
QF
QF
Output
Perfect Competition:
Industry Outcome
7.5
Initial Equilibrium: P = $6 & Q = 200.
After an increase in demand, the
short-run result (before entry) is:
P = $8 & Q = 240.
The long-run result (after entry) is:
P = $6 & Q = 280.
D’
Supply Curve
before Entry
D
$8
Supply Curve
after Entry
$6
$4
0
|
200 240
|
280 300
PRIVATE MARKET EFFICIENCY
7.6
Competitive Markets Provide the “Right”
Amounts of Goods and Services
that People Want and at Least Cost.
The Argument goes back to Adam Smith’s
“Invisible Hand” Metaphor.
We’ll Sketch the Argument Starting with:
Individual Transactions and Building
up to Competitive Markets.
A DAY-CARE EXAMPLE
7.7
Parents of a Two-Year Old are Willing
to Pay $8 per hour for up to 10 hours
of Day Care per Week.
The Granny Down the Street will
provide Care for $4 per Hour.
Can the Parties bargain to a
mutually beneficial agreement?
Yes
What if a second couple is
willing to pay $10 per hour?
$10 -
Consumer Surplus
$20 per Week
8 -
Couple’s
Maximum
Value
Consumer Surplus
$20
per Week
Producer
Profit
$40 perProfit
Week
Producer
P = $6 -
$20 per Week
4 -
Granny’s
Cost
2 0
0
|
|
|
|
|
|
2
4
6
8
10
12
7.8
A COMPETITIVE
DAY-CARE MARKET
All Buyers Pay Same Price.
12 10 -
Regional
Day-Care
Demand
MB
High Valuers Obtain Day Care.
Low-Cost Firms Supply
Day Care.
The Competitive Quantity
is Efficient.
8 6 -
Grandmothers
4 -
Day-Care
Supply
MC
$2.50
2 - “Store-Bought” Day Care
0
|
|
|
|
|
|
|
2
4
6
8
10
12
14
QC = 9.5
TRADE BARRIERS &
DEADWEIGHT LOSS
7.9
US Demand
US Supply
$15
DWL
World Price
under Free Trade
$12.50
US Imports
15
20
25
Deadweight loss under trade prohibition
is greater than w/ a $1.50 tariff.
US Demand
US Supply
$15
$14
$12.50
DWL
DWL
Imports
18
22
World Price
under Free Trade