Transcript Q πMax - David E. Harrington

wheat
memory
modules
Competitive Markets
Characteristics of Perfectly Competitive Markets
1. Many buyers and sellers in the market
2. Buying and selling nearly identical goods
and services
3. Firms can freely enter and exit the market
dowels
direct cremations
PMM
Market for
Memory Modules
PMM
Demand for
Western Digital
Memory Modules
S
Individual firms are
price-takers
P=75
Pe=75
D
Qe
QMM
(millions per year)
DWD
 Too small to ΔS
 Consumers would
quickly switch if  P
QMM
(thou. per year)
Western Digital Memory Modules
Being a price-taker,
WD can’t change
Total Revenue (TR) = Price (P) * Quantity (Q)
Hence, ΔTR = P * ΔQ
Dividing both sides by ΔQ yields
ΔTR
ΔQ
Marginal revenue (MR)—the additional
revenue from selling one additional unit
=P
For perfectly competitive firms,
MR equals price (not true for firms
in less than competitive markets).
Cost Curves of Parsons’ Mill
Cost
($ per
bundle)
MC
ATC reaches
its minimum
where
MC=ATC
Dist=AFC,
which is
larger at
lower Q
ATC
2.80
AVC
1.25
125
142
Quantity (bundles of dowels per day)
Cost
($ per
bundle)
PD
If $4
S
D
, what is QπMax ?
MC
QD
Δπ from Q from
Q=142 to QπMax
4.00
ATC
2.80
AVC
1.25
MR=P>MC(Q’)
125
QπMax
Quantity (bundles of dowels per day)
142 Q’
(=P for perfectly competitive firms)
If MR > MC then firms can econ π by Q
If MR < MC then firms can econ π by Q
(=P for perfectly competitive firms)
Hence, the profit maximizing output level (QπMax)
occurs where MR=MC. For perfectly competitive
firms, QπMax occurs where MR=P=MC.
To find QπMax for perfectly competitive firms,
Cost go from PMKT over to the MC curve and down.
($ per
bundle)
MC
PMKT=4.00
ATC
2.80
AVC
1.25
125
142 QπMax≈ 155
Quantity (bundles of dowels per day)
To find average total cost, go from QπMax up to
Cost the ATC curve and over to the vertical axis
($ per
bundle)
MC
PMKT=4.00
ATC(Q=155)
ATC
AVC
QπMax≈ 155
Quantity (bundles of dowels per day)
Cost
($ per
bundle)
Height of rectangle A+B
Base of rectangle A+B
Total Revenue = PMKT* QπMax = area A+B
Total Cost = ATC(Q=155) * QπMax = area B
Econ π = TR − TC = area A
PMKT=4.00
A
ATC(Q=155)
B
MC
ATC
AVC
QπMax≈ 155
Quantity (bundles of dowels per day)
Cost
($ per
bundle)
If Parsons’ Mill is suffering
econ losses, why does it
produce in the short-run?
Suppose PMKT=$2
TR=B+C
TC=A+B+C
Econ Losses= A
Because TR=B+C > TVC=C by B,
which can be applied against the
TFC of A+B. Shutting down
would produce econ losses = TFC
ATC(QπMax)
PMKT=2
AVC(QπMax)
MC
ATC
A
AFC(QπMax)
AVC
B
C
QπMax
Quantity (bundles of dowels per day)
Cost
($ per
bundle)
Supply curve of a
perfectly competitive
firm equals the MC MC
SShort-run
curve above the
shutdown price.
P>PSD
Produce
where
P=MC
ATC
AVC
PSD=1.25
P<PSD
shutdown
TR<TVC at all Q>0 125
Quantity (bundles of dowels per day)
“A year after Lewontin was
fired, Parsons closed the mill.”
PD
North Waterford, Maine
Josh
Saunders with dowels
Market for
Wooden Dowels
Parsons’ Mill
S2
S1
Short-run produce b/c P > min AVC
Long-run exit b/c econ losses
P2e
MC
ATC
AVC
P1e
D
Qe2 Qe1
QD
(millions…)
QπMax
QD
(thous…)
PD
Market for
Wooden Dowels
SMC
Long-Run
S2
P2e = min ATC
P2e
ATC
AVC
D
Qe2
QD
(millions…)
QπMax QD
(thous…)
Reaching Long-Run Equilibrium
 P until
Typical Mill:
Some Mills

  Supply  Typical Mill’s
Econ π < 0
Exit in LR
econ π = 0
SUPPLY CURVE IN A COMPETITIVE MARKET
The Supply Curve of an Individual Firm
Short-run: the MC curve above AVC
Market Supply = ∑Individual Supply Curves
PD
Parsons’
Mill
PD
S
P’
QPM
Saunders’
Brothers
S
P’
QD
QSB
PD
•••
QD
P’
Market
S
QD
(QPM+QSB+ • • •)
Let’s call it a Premium Club
(PC)
Known within the
health club industry as
a (no-frills) keycard club
(KC)
Smaller Gyms Show Muscle
Lower-cost chains may be financially fitter for expansion
“You typically won't see space-intensive amenities such as pools,
racquetball courts or steam rooms at [keycard clubs]. Some don't even
have locker rooms. Instead what you'll find is a surplus of cardio
machines in a small space and 24-hour access.”
The “popularity” of the keycard clubs “is soaring as the recession drives
people to spend less. And the newer gyms have emerged against a
backdrop of shifts within the industry, including bankruptcy filings by
some of the [premium gyms].
Average
300
Total Cost
($ per month)
250
200
150
100
ATC
ATC
50
PC
KC
0
0
500
1000
1500
2000
2500
3000
Pennsylvania Hospital
Point-to-Point Carrier
University of Pennsylvania Hospital
Hub Carrier
Hubs
Suppose the markets for keycard clubs (KC) and premium
clubs (PC) were in equilibrium prior to the recent
recession. Illustrate the effect of the recession on these
markets and describe the long-run adjustment process.