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Chapter 7 Perfect Competition
Perfect Competition ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Three Requirements of Perfect Competition ,[object Object],[object Object],[object Object],[object Object]
A Large Number of Buyers and Sellers ,[object Object],[object Object],[object Object]
A Standardized Product Offered by Sellers ,[object Object],[object Object]
Easy Entry into and Exit from the Market ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Easy Entry into and Exit from the Market ,[object Object],[object Object],[object Object]
Is Perfect Competition Realistic? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 1:  The Competitive Industry and Firm D $400 S Market Demand Curve Facing  the Firm $400 Firm Ounces of Gold per Day Price per Ounce 1. The intersection of the market supply and the market demand curve… 3. The typical firm can sell all it wants at the market price… Ounces of Gold per Day Price per Ounce 2. determine the equilibrium market price 4. so it faces a horizontal demand curve
Goals and Constraints of the Competitive Firm ,[object Object],[object Object],[object Object],[object Object]
The Demand Curve Facing a Perfectly Competitive Firm ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Demand Curve Facing a Perfectly Competitive Firm ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cost and Revenue Data for a Competitive Firm ,[object Object],[object Object],[object Object]
Figure 2(a):  Profit Maximization in Perfect Competition TR 550 $2,800 2,100 TC Slope = 400 Maximum Profit per Day = $700 Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8 9 10
Figure 2(b):  Profit Maximization in Perfect Competition MC $400 D = MR Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8 9 10
The Total Revenue and Total Cost Approach ,[object Object],[object Object],[object Object]
The Marginal Revenue and Marginal Cost Approach ,[object Object],[object Object],[object Object]
Measuring Total Profit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 3(a):  Measuring Profit or Loss $400 300 Profit per Ounce ($100) d = MR MC ATC Economic Profit Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8
Figure 3(a):  Measuring Profit or Loss MC ATC d = MR $300 200 Loss per Ounce ($100) Economic Loss Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8
The Firm’s Short-Run Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 4: Short-Run Supply Under Perfect Competition 0.50 1,000 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 MC ATC d 1 =MR 1 AVC (a) Firm's  Supply Curve 0.50 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 (b) d 2 =MR 2 d 3 =MR 3 d 4 =MR 4 d 5 =MR 5 Bushels per Year Dollars Price  per Bushel Bushels per Year
The Shutdown Price ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Competitive Markets in the Short- Run ,[object Object],[object Object],[object Object],[object Object],[object Object]
The (Short-Run) Market Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Short-Run Equilibrium ,[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 6:  Perfect Competition Quantity Demanded at Different Prices Quantity  Supplied at Different Prices Quantity Supplied by Each Firm Quantity Demanded by Each Consumer Individual Demand Curve Individual Supply Curve Quantity Demanded by All Consumers at Different Prices Quantity Supplied by All Firms at Different Prices Market Demand Curve Market Supply Curve P S D Q Market Equilibrium Added together Added together
Figure 7:  Short-Run Equilibrium in Perfect Competition 400,000 700,000 2.00 $3.50 S D 1 D 2 MC d 1 d 2 ATC 7,000 4,000 2.00 $3.50 Profit per Bushel at  p  = $3.50 Loss per Bushel at  p  = $2 3. If the demand curve shifts to  D 2  and the market equilibrium moves here . . . 4. the typical firm operates here and suffers a short-run loss. 2. the typical firm operates here, earning economic profit in the short run. 1. When the demand curve is  D 1   and market equilibrium is here . . . Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year
Profit and Loss and the Long Run ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
From Short-Run Profit to Long-Run Equilibrium ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
From Short-Run Profit to Long-Run Equilibrium ,[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 8(a/b):  From Short-Run Profit To Long-Run Equilibrium S 1 d 1 ATC MC $4.50 $4.50 900,000 9,000 A A D With initial supply curve  S 1 , market price is $4.50… So each firm earns an economic profit. Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year
Figure 8(c/d):  From Short-Run Profit To Long-Run Equilibrium S 1 d 1 ATC MC $4.50 $4.50 900,000 9,000 5,000 S 2 d 1 A A 2.50 2.50 E E D 1,200,000 Profit attracts entry, shifting the supply curve rightward… until market price falls to $2.50 and each firm earns zero economic profit. Market Firm Price per Bushel Bushels per Year Dollars Bushels per Year
From Short-Run Loss to Long-Run Equilibrium ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Distinguishing Short-Run from Long-Run Outcomes ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Notion of Zero Profit in Perfect Competition ,[object Object],[object Object],[object Object]
Perfect Competition and Plant Size ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 9:  Perfect Competition and Plant Size P 1 q 1 d 1   = MR 1 LRATC MC 1 ATC 1 E d 2  = MR 2 LRATC MC 2 ATC 2 P* q* . 4. and all firms earn zero economic profit and produce at minimum  LRATC. Dollars Dollars Output per Period Output per Period 3. As  all  firms increase plant size and output, market price falls to its lowest possible level . . . 1. With its current plant and   ATC   curve, this firm earns zero economic profit. 2. The firm could earn positive profit with a larger plant, producing here.
A Summary of the Competitive Firm in the Long-Run ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
A Change in Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 10:  An Increasing-Cost Industry INITIAL EQUILIBRIUM D 1 S 1 A P 1 Q 1 P 1 q 1 MC A ATC 1 d 1  = MR 1 Output per Period Market Dollars Firm Output per Period Price per Unit
Figure 10:  An Increasing-Cost Industry NEW EQUILIBRIUM d SR  = MR SR d 2  = MR 2 P 2 P SR P 2 P SR ATC 2 C B B C Q SR Q 2 q 1 q 1 S 2 S LR D 2 MC ATC 1 Dollars Firm P 1 q 1 A d 1  = MR 1 Output per Period Market S 1 Output per Period Price per Unit D 1 A P 1 Q 1
Increasing, Decreasing, and Constant Cost Industries ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Increasing, Decreasing, and Constant Cost Industries ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Market Signals and the Economy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Market Signals and the Economy ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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Ch07 cmba 401

  • 1. Chapter 7 Perfect Competition
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  • 9. Figure 1: The Competitive Industry and Firm D $400 S Market Demand Curve Facing the Firm $400 Firm Ounces of Gold per Day Price per Ounce 1. The intersection of the market supply and the market demand curve… 3. The typical firm can sell all it wants at the market price… Ounces of Gold per Day Price per Ounce 2. determine the equilibrium market price 4. so it faces a horizontal demand curve
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  • 14. Figure 2(a): Profit Maximization in Perfect Competition TR 550 $2,800 2,100 TC Slope = 400 Maximum Profit per Day = $700 Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8 9 10
  • 15. Figure 2(b): Profit Maximization in Perfect Competition MC $400 D = MR Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8 9 10
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  • 19. Figure 3(a): Measuring Profit or Loss $400 300 Profit per Ounce ($100) d = MR MC ATC Economic Profit Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8
  • 20. Figure 3(a): Measuring Profit or Loss MC ATC d = MR $300 200 Loss per Ounce ($100) Economic Loss Ounces of Gold per Day Dollars 1 2 3 4 5 6 7 8
  • 21.
  • 22. Figure 4: Short-Run Supply Under Perfect Competition 0.50 1,000 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 MC ATC d 1 =MR 1 AVC (a) Firm's Supply Curve 0.50 2,000 4,000 5,000 7,000 1.00 2.00 $3.50 2.50 (b) d 2 =MR 2 d 3 =MR 3 d 4 =MR 4 d 5 =MR 5 Bushels per Year Dollars Price per Bushel Bushels per Year
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  • 27. Figure 6: Perfect Competition Quantity Demanded at Different Prices Quantity Supplied at Different Prices Quantity Supplied by Each Firm Quantity Demanded by Each Consumer Individual Demand Curve Individual Supply Curve Quantity Demanded by All Consumers at Different Prices Quantity Supplied by All Firms at Different Prices Market Demand Curve Market Supply Curve P S D Q Market Equilibrium Added together Added together
  • 28. Figure 7: Short-Run Equilibrium in Perfect Competition 400,000 700,000 2.00 $3.50 S D 1 D 2 MC d 1 d 2 ATC 7,000 4,000 2.00 $3.50 Profit per Bushel at p = $3.50 Loss per Bushel at p = $2 3. If the demand curve shifts to D 2 and the market equilibrium moves here . . . 4. the typical firm operates here and suffers a short-run loss. 2. the typical firm operates here, earning economic profit in the short run. 1. When the demand curve is D 1 and market equilibrium is here . . . Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year
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  • 32. Figure 8(a/b): From Short-Run Profit To Long-Run Equilibrium S 1 d 1 ATC MC $4.50 $4.50 900,000 9,000 A A D With initial supply curve S 1 , market price is $4.50… So each firm earns an economic profit. Price per Bushel Market Bushels per Year Dollars Firm Bushels per Year
  • 33. Figure 8(c/d): From Short-Run Profit To Long-Run Equilibrium S 1 d 1 ATC MC $4.50 $4.50 900,000 9,000 5,000 S 2 d 1 A A 2.50 2.50 E E D 1,200,000 Profit attracts entry, shifting the supply curve rightward… until market price falls to $2.50 and each firm earns zero economic profit. Market Firm Price per Bushel Bushels per Year Dollars Bushels per Year
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  • 38. Figure 9: Perfect Competition and Plant Size P 1 q 1 d 1 = MR 1 LRATC MC 1 ATC 1 E d 2 = MR 2 LRATC MC 2 ATC 2 P* q* . 4. and all firms earn zero economic profit and produce at minimum LRATC. Dollars Dollars Output per Period Output per Period 3. As all firms increase plant size and output, market price falls to its lowest possible level . . . 1. With its current plant and ATC curve, this firm earns zero economic profit. 2. The firm could earn positive profit with a larger plant, producing here.
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  • 41. Figure 10: An Increasing-Cost Industry INITIAL EQUILIBRIUM D 1 S 1 A P 1 Q 1 P 1 q 1 MC A ATC 1 d 1 = MR 1 Output per Period Market Dollars Firm Output per Period Price per Unit
  • 42. Figure 10: An Increasing-Cost Industry NEW EQUILIBRIUM d SR = MR SR d 2 = MR 2 P 2 P SR P 2 P SR ATC 2 C B B C Q SR Q 2 q 1 q 1 S 2 S LR D 2 MC ATC 1 Dollars Firm P 1 q 1 A d 1 = MR 1 Output per Period Market S 1 Output per Period Price per Unit D 1 A P 1 Q 1
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