Transcript lec13bw - People.vcu.edu

Today
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Perfect competition
Profit-maximization in the SR
The firm’s SR supply curve
The industry’s SR supply curve
Perfect Competition
Chapter 21
Market Structure
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Market Structure: the key features of a
market, including:
– # of firms
– type of product
– nature of firm’s cost
– # of buyers
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Market structure is usually defined in
terms of sellers.
Four Basic Models
A Rule of Thumb
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The fewer the firms in the market, the
more control each firm has over price.
Perfect Competition
Perfect Competition:
Five Assumptions
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Homogeneous Product: Goods
produced by different sellers are
perceived to be identical by consumers.
Perfect Information about Prices
Given the first two assumptions, will a
seller be able to sell his product for a
price higher than his competitors?
Assumptions 3-5
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The market is large enough to support
many sellers.
The firms are price takers: they acts as
if their own output has no effect on
price.
No barriers to entry: firms can enter and
exit the market freely.
Examples of Perfectly
Competitive Industries
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wheat, corn, etc.
steel
coal
Revenue (assuming fixed price
per unit)
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Total Revenue (TR) = price x quantity
sold (PQ)
Average Revenue (AR) = (TR/Q) =
(PQ/Q) = P
Marginal Revenue (MR) = DTR/DQ the
change in TR when output rises by one
unit.
Profits = TR - TC (or TR - TFC - TVC)
Note on Marginal Revenue
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The above definition is a general
definition of MR that works for all
industry structures. In perfect
competition, since firms are price
takers, MR = P = AR.
For any other market structure, MR < P.
Demand for a Particular Firm’s
Output
P
Typical Firm
P
d = AR = MR
P*
Industry or Market
S
P*
D
q
Q*
The price-taking firm faces a perfectly elastic
demand for its product at the market price.
Q
Short-Run Production Decisions
Decision 1
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Should the firm produce anything?
Produce if:
profit producing > profit not producing
TR - TFC - TVC > 0 - 0 -TFC
TR > TVC
TR/Q > TVC/Q
Produce in SR if P > AVC
Graph of Decision 1
P
Typical Firm
AV C
P1
Produce
P2
Don’t
Produce
q
Decision 2
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If the firm does produce in the SR, then:
Decision 2: How much should it produce
in the SR?
max profits = max (TR - TFC - TVC)
Given TFC do not vary with output, we
can ignore them when choosing output.
If we choose q to maximize TR- TVC,
we will also be maximizing profits.
Total Revenue on Graph of
Marginal Revenue
P
P = AR = MR
q
TR is the area under MR.
Total Variable Cost on Graph of
Marginal Cost
P
MC
q
TVC is the area under MC.
Total Revenue Minus Total
Variable Cost on Graph
P
Profit over operating
costs.
MC
MR = P =
AR
q
q*
If we maximize TR - TVC then we will maximize profits.
TR - TVC is maximized when MR = MC.
The Firm’s Profit-Maximizing
Rule
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Choose quantity where MR = MC (given
MC is sloping upward and AVC are
covered).
Price-Taking and ProfitMaximization
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For price-taking firms, MR = P.
Maximize profits by choosing q where
MC = P.
The Firm’s Supply Curve
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The firm’s supply curve tells how much
the firm will produce in the short run at
every possible price, given a fixed plant
size.
Graphing the Firm’s Supply
Curve
P
MC
AVC
P0
q
Graphing the Firm’s Supply
Curve
P
MC
AVC
P1
P0
q
Graphing the Firm’s Supply
Curve
P
MC
AVC
P2
P1
P0
q
Graphing the Firm’s Supply
Curve
P
P3
MC
AVC
P2
P1
P0
q
Graphing the Firm’s Supply
Curve
P
P3
SRS
MC
AVC
P2
P1
P0
q
Firm’s SR Supply Curve
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The firm’s supply curve is equal to its
MC curve above AVC.
P1 is sometimes called the “shutdown
point” because if price falls below P1,
the firm shuts down in the short run.
Industry Short Run Supply Curve
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Industry SR Supply Curve: tells us how
much the industry will produce at every
possible price, given fixed plant sizes
and a fixed number of firms.
Deriving Industry Supply
P
Firm 1
3
P
mc1
P
Firm 2
mc2
Industry
SRS
2
1
10 22
15
15 20
17
q
25
32
42 Q
The industry supply curve is the horizontal summation of the
firms’ marginal cost curves (above their AVC curves).
Next Time
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SR market equilibrium
Changes in equilibrium
LR equilibrium
Group Work
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The firm’s SR supply curve.
The Industry’s SR supply curve.
The Price-Taking Firm’s SR
Supply Curve
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Look at the graph (next slide) to answer these
questions:
In the short run, if the market price is $3, what
quantity will the firm produce? _____
In the short run, if the market price is $5.25,
what quantity will the firm produce? _____
In the short run, if the market price is $7.50,
what quantity will the firm produce? _____
Trace out the firm's short-run supply curve.
Firm’s SR Supply Curve
$/q
12
MC
10
8
ATC
AVC
6
4
2
0
0
2
4
6
8
10
12
14
16
18
20
22
24
Quantity
Short Run Industry Supply
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Suppose that there are 100 price-taking
firms in this industry and all have
identical cost curves to the firm depicted
in the graph.
Draw the short-run industry supply
curve in the right-hand panel of the next
slide. Be sure to use the scale
provided.
Short Run Industry Supply
$/q
12
MC
Typical Firm
Industry
10
8
ATC
6
AVC
4
2
0
0
2
4
6
8
10
12
Quantity
0
200
400
600
800
1000
Quantity