Transcript E160.S11.W10.Competition.PP

ECON 160
Week 10
The Firm in Competition
(Chapter 13)
Review
• Production is organized within Firms to
take advantage of the benefits of Teamwork
& Specialization.
• Owners receive Profits to monitor their
behavior to Maximize TR and Minimize
TC.
• Profits (Π) is increased if MR > MC.
• What rate of output, Maximizes Π ?
Alternative Rates of Production
Wks
1
2
3
4
5
6
7
8
9
10
Qty.
10
25
45
62
76
86
91
95
97
98
M.P
10
15
20
17
14
10
5
4
2
1
Marginal Product
• At first: Teamwork and specialization 
Increasing marginal product as you add
workers.
• Law of Diminishing Returns: As you add
more of one input to a fixed amount of other
inputs, Marginal product declines.
Marginal Product
Marg.
Product
20
18
16
14
12
10
8
6
4
2
0
3-D Column 1
1
2
3
4
5
6
7
8
9
10
Workers
Marginal Cost of Production
Wks
1
2
3
4
5
6
7
8
9
10
Qty.
10
25
45
62
76
86
91
95
97
98
M.P
10
15
20
17
14
10
5
4
2
1
TC
120
140
160
180
200
220
240
260
280
300
M.C. $2.00 $1.33 $1.00 $1.18 $1.43 $2.00 $4.00 $5.00 10.00 20.00
Marginal Cost
Marg. Cost
$ Marginal
Cost
5
4
3
2
1
Qtys/Day
0
10
25
45
62
76
86
91
95 97
98
Marginal Cost
$ COST
Marginal
Cost
Quantity of Output / Time period
Average Cost of Production
Wks
1
2
3
4
5
6
7
8
9
10
Qty.
10
25
45
62
76
86
91
95
97
98
M.P
10
15
20
17
14
10
5
4
2
1
TC
120
140
160
180
200
220
240
260
280
300
M.C
.
$2.00
$1.33
$1.00
$1.18
$1.43
$2.00
$4.00
$5.00
10.00
20.00
A.C.
12.00 5.60
3.55
2.90
2.64
2.56
2.73
2.74
2.89
3.06
Average Cost
Average Cost
$ Cost 12
10
8
6
4
2
0
10
25
45
62
76
86
91
95
97
98
Qtys/Day
Average Total Cost
$ COST
Average
Total Cost
Quantity of Output
Average Total Cost & Marginal Cost
$ COST
Marginal
Cost
Average
Total Cost
Quantity of Output / Time
Economies of Scale
$ COST
Average
Total Cost
Minimum ATC
Dis-Economies of Scale
Economies of Scale
Quantity of Output
Demand Facing the Firm
$P
$P
D1
$P
D2
Q
Q
$P
D3
Q
Increasing degrees of Competition 
 Increasing degrees of Market Power 
D4
Q
Alternative Market Structures
The Most Competitive Case:
The Price Taker Firm
Market and Firm Demand
$P
$P
Market
D
Firm
S
Pe
Pe
D
S
D
Qe
Q/T
Q/T
Price Taker Firm
$P
MC
Pe
Price = Marginal
Revenue
D = MR
Profit Maximizing
Rate of output
Qe
Q/T
Assumptions for a Price Taker
•
•
•
•
Large number of buyers & sellers
Homogeneous products
Low information costs to buyers & sellers
Low costs of entry and exit of firms
Total Revenue = Pe x Qe
$P
MC
Pe
D
Total Revenue
Qe
Q/T
Total Cost = AC x Q
$P
MC
AC
Pe
D
AC at Qe
Total Cost
Qe
Q/T
Profit = TR - TC
$P
MC
AC
Pe
D
Q
Q/T
Market Response to Profits
$P
D
So
S’
Pe
P’
D
So
Qe Q’
Qx/T
Price Taker Firm: Zero Profits
$P
MC
ATC
D
Pe’
D’ = MR
Qe
Q/T
Price Taker Firm: Loss
$P
Pe
MC
Loss
ATC
D = MR
Qe
Q/T
Market Response to Losses
$P
D
S’
So
P’
Po
S’
D
Q’ Qo
Qx/T
Price Taker Firm: Zero Profits
$P
MC
ATC
Pe’
D’ = MR
Po
D
Qe
Q/T
Profits occur if (P=MC) > AC
$P
MC
AC
Pe
D = MR
Qe
Q/T
Price Taker Firm: Loss but stay
in business Short-Run
$P
MC
Loss
AC
Pc
ATC
AVC
Demand
TFC
Shut down Loss
Total Revenue
TVC
Qc
Q/T
Short Run Firm Supply: MC > AVC
MC
$P
Profit Range
Min. Loss Range
SR Firm Supply
AC
AVC
Q/T
Long-Run Industry Equilibrium
$P
$P
Market
D
Firm
MC
S
ATC
Pe
Pe
D
S
D
Qe
Q/T
Qe
Q/T
Implications of Price-Taker Industry
• Demand for the firm is horizontal at the
market price
• Efficiency: Price equals marginal cost of
production
• Competition drives price to equal Average
cost
• Economic profits only exist in the short-run.