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econ2_micro_ch08.pptx
1.
ECON Designed by Amy McGuire,
B-books, Ltd. McEachern 2010-2011 8 C H A P T E R Perfect Co m petition Micro Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 1
2.
An Introduction to Perfect
Competition Market structure – Number of suppliers – Product’s degree of uniformity – Ease of entry into the market – Forms of competition among forms Industry – All firms supplying output to a market LO1 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 2
3.
Perfectly Competitive Market Structure
Many buyers and sellers Commodity; standardized product Fully informed buyers and sellers No barriers to entry Individual buyer or seller – No control over price – Price takers LO1 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 3
4.
Demand Under Perfect Competition LO1
Market price – Determined by S and D Demand curve facing one supplier – Horizontal line at the market price – Perfectly elastic Price taker Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 4
5.
LO1 Market Equilibrium and
a Firm’s Demand Curve in Perfect Competition Price per bushel $5 D (a) Market equilibrium S Price per bushel $5 d (b) Firm’s demand Bushels of wheat per day 0 1,200,000 Bushels of wheat per day 0 5 10 15 Market price ($5)- determined by the intersection of the market demand and market supply curves.A perfectly competitive firm can sell any amount at that price. The demand curve facing the perfectly competitive firm - horizontal at the market price. Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 5 Exhibit 1
6.
Short-Run Profit Maximization Maximize
economic profit Quantity at which TR exceeds TC by the greatest amount Total revenue TR Total cost TC Profit = TR – TC If TR > TC: economic profit If TC > TR: economic loss LO2 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 6
7.
Short-Run Profit Maximization Marginal
revenue MR = P = AR (perfect competition) Marginal cost MC Maximize economic profit: Increase production as long as each additional unit adds more to TR than TC Golden rule Expand output: MR>MC Stop before MC>MR LO2 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 7
8.
LO2 Short-Run Cost
and Revenue for a Perfectly Competitive Firm Exhibit 2 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 8
9.
LO2 Short-Run Profit Maximization (a) Total
revenue minus total cost TR: straight line, slope=5=P TC increases with output Max Economic profit: where TR exceeds TC by the greatest amount (b) Marginal cost equals marginal revenue MR: horizontal line at P=$5 Max Economic profit: at 12 bushels, where MR=MC Exhibit 3 Total cost Total revenue (=$5 × q) Total dollars $60 48 15 Bushels of wheat per day 0 5 7 10 12 15 Dollars per bushel $5 4 Bushels of wheat per day 0 5 7 10 12 15 Average total cost d = Marginal revenue = Average revenue Marginal cost Maximum economic profit = $12 a Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 9 e Profit
10.
Minimizing Short-Run Losses Chapter 8
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 10 LO3 – TC = FC+VC – Shut down in short run: pay fixed cost – If TC<TR: economic loss • Produce if TR>VC (P>AVC) – Revenue covers variable costs and a portion of fixed cost – Loss < fixed cost • Shut down if TR<VC (P<AVC) – Loss = FC
11.
LO3 Minimizing Short-Run Losses Exhibit
4 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 11
12.
LO3 Short-Run Loss Minimization (a) Total
revenue minus total cost TC>TR; loss Minimize loss: 10 bushels (b) Marginal cost equals marginal revenue MR=MC=$3;ATC=$4 P=$3; P>AVC Continue to produce in short run Exhibit 5 T otal cost Total revenue (=$3 × q) Total dollars $40 30 15 Bushels of wheat per day 0 5 Average total cost d = Marginal revenue = Average revenue 10 15 Marginal cost Minimum economic loss = $10 e Loss 0 5 10 15 Bushels of wheat per day Dollars per bushel $4.00 3.00 2.50 Average variable cost Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 12
13.
Firm and Industry Short-Run
S Curves Short-run firm supply curve – Upward sloping portion of MC curve – Above minimum AVC curve Short-run industry supply curve – Horizontal sum of all firms’ short-run supply curves LO4 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 13
14.
LO4 Summary of Short-Run
Output Decisions Average total cost Average variable cost Marginal cost d1 d2 d3 d4 d5 1 2 3 4 q2 q3 q4 q5 q1 Quantity per period p2 p1 p3 p4 p5 0 Dollars per unit Shutdown point Break-even point 5 p5>ATC, q5, economic profit Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 14 p2=AVC, q2 or 0, loss=FC ATC>p3>AVC, q3, loss <FC p <AVC, shut down, 1 q1=0,loss=FC 4 4 p =ATC, q , normal profit Firm’s short-run S curve Exhibit 6
15.
LO4 0 10 20 Quantity per
period p p’ Price per unit 0 10 20 Quantity per period p p’ 0 10 20 Quantity per period p p’ 30 60 Quantity per period 0 p p’ Aggregating Individual Supply to Form Market Supply (a) Firm A (b) Firm B (c) Firm C (d) Industry, or market, supply SA SB SC SA + SB + SC = S Exhibit 7 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 15
16.
Firm Supply and Market
Equilibrium Short run, perfect competition – Market converges to equilibrium P and Q – Firm • Max profit • Min loss • Shuts down temporarily LO4 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 16
17.
LO4 Short-Run Profit Maximization
and Market Equilibrium S = horizontal sum of the supply curves of all firms in the industry Intersection of S and D: market price $5 Market price $5 determines the perfectly elastic demand curve (and MR) facing the individual firm. Exhibit 8 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 17
18.
LO4 Case Stud y AuctionMarkets Dutch auction
Starts at a high price and works down Selling multiple lots of similar items English open outcry auction Starts at low price and works up Internet auctions Nasdaq – virtual stock market Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 18
19.
LO5 Perfect Competition in the
Long Run Long run Firms enter/exit the market Firms adjust scale of operations Until average cost is minimized All resources are variable Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 19
20.
Perfect Competition in the
Long Run Economic profit in short run New firms enter market in long run Existing firms expand in long run Market S increases P decreases Economic profit disappears Firms break even LO5 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 20
21.
Perfect Competition in the
Long Run Economic loss in short run Some firms exit the market in long run Some firms reduce scale in long run Market S decreases P increases Economic loss disappears Firms break even LO5 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 21
22.
LO5 Zero Economic Profit in
the Long Run Firms enter, leave, change scale Market: S shifts; P changes Firm d(P=MR=AR) shifts Long run equilibrium MR=MC =ATC=LRAC Normal profit Zero economic profit Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 22
23.
LO4 Quantity per period 0 Q Quantity per
period 0 q MC Dollars per unit p Price per unit p S D ATC LRAC d Long run equilibrium: P=MC=MR=ATC=LRAC. No reason for new firms to enter the market or for existing firms to leave.As long as the market demand and supply curves remain unchanged, the industry will continue to produce a total of Q units of output at price p. e Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 23 Long-Run Equilibrium for a Firm and the Industry (a) Firm (b) Industry or market Exhibit 9
24.
LO5 Long-Run Adjustment to a
Change in D Effects of an Increase in Demand Short run P increases; d increases Firms increase quantity supplied Economic profit Long run New firms enter the market S increases, P decreases Firm’s d curve decreases Normal profit Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 24
25.
LO5 Long run: new
firms enter the industry; supply increases to S’; price drops back to p; firm’s demand drops back to d. Increase in D to D’ moves the market equilibrium point from a to b; firm’s demand increases to d’; economic profit in short run. Exhibit 10 Long-Run Adjustment to an Increase in Demand (a) Firm (b) Industry or market MC S ATC LRAC d D’ D a b Price per unit p p’ Quantity per period 0 Qa Qb Qc Dollars per unit p p’ d’ Quantity per period 0 q q’ Profit S’ c S* Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 25
26.
LO5 Long-Run Adjustment to a
Change in D Effects of a Decrease in Demand Short run P decreases; d decreases Firms decrease quantity supplied Economic loss Long run Firms exit the market S decreases, P increases Firm’s d curve increases Normal profit Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 26
27.
LO5 Long run: firms
exit the industry; supply decreases to S’’; price increases back to p; firm’s demand rises back to d. Decrease in D to D’’ moves the market equilibrium point from a to f; firm’s demand decreases to d’’; economic loss in short run. Exhibit 11 d Long-Run Adjustment to a Decrease in Demand (a) Firm (b) Industry or market MC S D ATC LRAC D’’ a f Price per unit p p’’ Quantity per period 0 Qg Qf Qa Dollars per unit p p’’ d’’ Quantity per period 0 q’’ q Loss S’’ g S* Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 27
28.
The Long-Run Industry Supply
Curve Short run Change quantity supplied along MC curve Long run industry supply curve S* After firms fully adjust Constant-cost industries LRAC doesn’t shift with output Long run S* curve for industry: straight horizontal line LO6 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 28
29.
Increasing Cost Industries Average
costs increase as output expands Effects of an increase in demand Short run P increases; d increases Firms increase q; Economic profit Long run New firms enter the market; Market: S increases; P decreases Firm: MC and ATC increase; d curve decreases; Zero economic profit LO6 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 29
30.
LO6 An Increasing-Cost Industry D
increases to D’, new short-run equilibrium: point b. Higher price pb; firm’s demand curve shifts up (db); economic profit, which attracts new firms. Input prices go up, MC and ATC curves shift up. Market S increases to S’; new price pc, firm’s demand curve shifts down to dc; normal profit. Exhibit 12 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 30
31.
Perfect Competition and Efficiency Productive
efficiency: Making Stuff Right Produce output at the least possible cost Min point on LRAC curve P = min average cost in long run Allocative efficiency: Making the Right Stuff Produce output that consumers value most Marginal benefit = P = Marginal cost Allocative efficient market LO7 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 31
32.
What’s So Perfect
About Perfect Competition? Consumer surplus Consumers pay less (P) than they are willing to pay (along D curve) Producer surplus Producers are willing to accept less (along S curve; MC) than what they are receiving (P) Gains from voluntary exchange Consumer and producer surplus Productive and allocative efficiency Maximum social welfare LO7 Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 32
33.
LO7 0 100,000 120,000 200,000 Quantity per period $10 6 5 Dollars per unit S D e m Consumer surplus Chapter
8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 33 Producer surplus Consumer Surplus and Producer Surplus for a Competitive Market Consumer surplus: area above the market-clearing price ($10) and below the demand. Producer surplus: area above the short-run market supply curve and below the market-clearing price At p=$5: no producer surplus; the price just covers each firmsAVC. At p=$6: producer surplus is the area between $5, $6, and S curve. Exhibit 13
34.
LO7 Case Stud y Experimental Economics Double-continuous
auction Tests subjects (buyers, sellers) Market equilibrium Max social welfare Adjust fast to changing market conditions High transaction costs Posted-offer pricing Price is marked not negotiated Slow adjustment to changing market conditions Low transaction costs Chapter 8 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 34
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