Transcript PERFECTLY COMPETITIVE MARKETS

PERFECTLY COMPETITIVE
MARKETS
MAIN ASSUMPTION OF PERFECT
COMPETITION
  many small firms (too small to affect the market price)
  identical product
  free entrance inwards and outwards the market (no
barriers)
  perfect information
  firms produce and sell their output at given market
prices firms are so called „price-takers“
under such conditions, each producer faces a
completely horizontal demand curve
Revenues in perfect competition
• Total revenues depend exclusively on the quantity of
production and are directly proportional to it
• AR are constant 
the AR curve is straight line
parallel with the X-axis at the level of given price
• MR curve is identical to AR curve
COMPETITIVE SUPPLY
• A typical perfect competitor will be able to sell any
amount of output at the going market price. Under
perfect competition, a profit-maximizing firm will set
its production at the level where marginal cost equals
price
• P = MC
• what will happen, if the market price changes? –
when increases, it will cause the change in firms
optimal output along the rule P = MC  this means
that a firm’s marginal cost curve is also its supply
curve!
Relative, Absolute loss and Opportunity cost
 Relative loss – decline in achieved profit by producing
more than is optimal,
 Absolute loss – real loss in case the total costs exceed
the total revenue,
 Opportunity cost – in case firm produce less Q than
corresponds to economic equilibrium.
Optimum of Firm, Relative Loss and Opportunity
Cost
MC
EUR/Q
AC
RELATIVE LOSS
MR = AR = d
OPPORTUNITY COST
Q2
Q*
Q1
Q
THE SHOTDOWN CONDITION – IN THE
SHORT RUN
 the critically low market price at which revenues just
equal variable cost (or at which losses exactly equal
fixed costs) is called the SHUTDOWN POINT
 – for prices above the shutdown point, the firm will
produce along its marginal cost curve, for prices
below the shutdown point, the firm will produce
nothing at all
The Shotdown Condition in the Short Run
MC
EUR/Q
AC
AVC
ZTRÁTA
MR= AR = d
QSD
Q
BREAKEVEN POINT
 price is equal to AC, means total revenues just cover
total costs
 in a long run is unacceptable the situation, where the
total cost are higher than total revenues (and the price
lower than AC), because firms would tend to leave this
market  the long-run breakeven condition comes at a
critical P where identical firms just cover their full
competitive costs
 - the long-run equilibrium condition of firm can be
summed up:
 MR = MC = AC = AR, alias P = MC = AC
THE EFFICIENCY OF COMPETITIVE MARKETS
• 1. P = MU Everybody gains P utils of satisfaction
from the last unit of good
• 2. P = MC The price of good exactly equals the MC
of the last unit of good supplied
• 3.
MU = MC The marginal gains to society from the
last consumed unit equal to the marginal costs to
society of that last unit produced, which guarantees
that a competitive equilibrium is efficient.
Tasks:

Compare the price and quantity produced in perfect competition in the
short- and long-run. Price of the short run is 15,- EUR, set the price of the
long run.

Q
1
2
3
4
5
6
7
TC
20
30
33
36
50
78
112
Decide about the optimal quantity of production and the shotdown point
of perfectly competitive firm in the short run knowing: the price 95,- Eur,
fixed costs = 2 and
Q
1
2
3
4
5
6
7
AC
40
38
37
40
46
54
63