Transcript Chapter 8 PP

SAYRE | MORRIS
Seventh Edition
CHAPTER 8
Perfect Competition
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Industry
• a group of producers
Market
• the interaction of both producers and consumers
Perfect Competition
• a market in which all buyers and sellers are price
takers
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LO1
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Conditions for Perfect
Competition
1. many small buyers and sellers all of whom are
price takers
2. no preferences shown
3. easy entry and exit by both buyers and sellers
4. the same market information available to all
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Conditions for a Market System
1.
2.
3.
4.
extensive specialization and trade,
perfect competition,
private ownership of productive resources, and
a legal and social foundation
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The Competitive
Industry and Firm
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Total Revenue
• total quantity sold (Q) times price (P)
Average Revenue
• the amount of revenue received per unit sold
Average Revenue (AR) 
QP
Total Revenue (TR)
or
P
Output (Q)
Q
Marginal Revenue
• the extra revenue derived from one more unit
Marginal Revenue 
Q  P
Total Revenue (TR)
or
P
Output (Q)
Q
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Given a perfectly elastic demand curve, Price  AR = MR
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Price is $20/unit sold.
AR =
MR =
TR = 80 = 20
Output
4
TR = 80 – 60 = 20 = 20
output
4–3
1
So, with perfect competition : Price = AR = MR = D
The demand curve for an individual firm is a horizontal
line.
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LO3
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Profit and Output
Total Profit
• the difference between total revenue and total costs:
T  TR  TC
• A firm will maximize profit when
(Total Revenue  Total Cost) is greatest.
Break-even Output
• the level of output at which the sales revenue of the
firm just covers fixed and variable costs, including
normal profit
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LO3
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Marginal Approach to Profit
If MR > MC →
If MR < MC →
produce more
produce less
To maximize total profit, the firm should increase
production to the point at which:
MR = MC
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Break-even and Shutdown
Break-even Price
• the price at which the firm makes only normal profits; that
is, makes zero economic profits
• As long as the losses from production are less than total
fixed costs, the firm should continue to produce
Shutdown Price
• the price that is just sufficient to cover a firm’s variable
costs
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Deriving the Supply Curve
• The supply curve for a firm is that portion of its MC curve
that lies above its average variable cost curve
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Industry Demand and Supply
• In the short run the size of both the firm and the industry
are fixed; In the long run, both are variable
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Industry Demand and Supply
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Increasing Cost Industry
• an industry in which the prices of resources and
products both rise as the industry expands
Decreasing Cost Industry
• an industry in which the prices of resources and
products both fall as the industry expands
Constant Cost Industry
• an industry in which the prices of resources and
products remain unchanged as the industry
expands
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LO6
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