Transcript Pure Competition

Chapter 10
Pure Competition in the Short Run
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Four Market Models
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Pure competition
Pure monopoly
Monopolistic competition
Oligopoly
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
LO1
10-2
Pure Competition: Characteristics
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LO2
Very large numbers of sellers
Standardized product
“Price takers”
Easy entry and exit
10-3
Purely Competitive Demand
• Perfectly elastic demand
• Firm produces as much or little as they wish
at the market price
• Demand graphs as horizontal line
LO3
10-4
Average, Total, and Marginal
Revenue
• Average revenue
• Revenue per unit
• AR = TR/Q = P
• Total revenue
• TR = P X Q
• Marginal revenue
• Extra revenue from 1 more unit
• MR = ΔTR/ΔQ
LO3
10-5
Profit Maximization: TR – TC
Approach
• The competitive producer will ask three
questions
• Should the firm produce?
• If so, in what amount?
• What economic profit (loss) will be
realized?
LO4
10-6
Loss-Minimizing Case
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LO5
Loss minimization
Still produce because MR > minimum AVC
Losses at a minimum where MR = MC
Producing adds more to revenue than to costs
10-7
3 Production Questions
Output Determination in Pure Competition in the Short Run
Question
Answer
Should this firm produce?
Yes, if price is equal to, or greater than,
minimum average variable cost. This means
that the firm is profitable or that its losses
are less than its fixed cost.
What quantity should this firm produce?
Produce where MR (=P) = MC; there, profit is
maximized (TR exceeds TC by a maximum
amount) or loss is minimized.
Will production result in economic profit?
Yes, if price exceeds average total cost (TR
will exceed TC). No, if average total cost
exceeds price (TC will exceed TR).
LO6
LO3
10-8
Firm and Industry: Equilibrium
Firm and Market Supply and Market Demand
LO6
LO4
(1)
Quantity
Supplied,
Single
Firm
(2)
Total
Quantity
Supplied,
1000 Firms
(3)
Product
Price
(4)
Total
Quantity
Demanded
10
10,000
$151
4000
9
9000
131
6000
8
8000
111
8000
7
7000
91
9000
6
6000
81
11,000
0
0
71
13,000
0
0
61
16,000
10-9
Firm versus Industry: Equilibrium
S = ∑ MC’s
s = MC
Economic
profit
ATC
d
$111
$111
AVC
D
8
LO6
8000
10-10
Fixed Costs: Digging Out of a Hole
• Shutting down in the short run does not mean
shutting down forever
• Low prices can be temporary
• Some firms switch production on and off
depending on the market price
• Examples: oil producers, resorts, and firms
that shut down during a recession
10-11