econ 503 discussion board post
kentucky79
Tucker.Ch08_LECTURE_SLIDES_EFT_9e.ppt*
Chapter 8
Perfect Competition
Lecture Slides
Economics for Today
Irvin B. Tucker
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What will I learn in this chapter?
- This chapter discusses how competitive markets determine prices, output, and profits
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What is
market structure?
- A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit
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What is
perfect competition?
A market structure characterized by:
1. Large number of small firms
2. Homogeneous product
3. Very easy entry and exit
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What is meant by a large number of firms?
- A large number of sellers condition is met when each firm is so small relative to the total market that no single firm can influence the market price
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What does
homogeneous mean?
- Goods that cannot be distinguished from one another. For example, farmer Brown’s wheat is identical to farmer Jones’s wheat.
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What conclusion can we make concerning a homogeneous product?
- If a product is homogeneous, buyers are indifferent as to which seller’s product they buy
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What does very easy entry mean?
- Perfect competition requires that a new firm faces no barriers to entry, such as financial, technical, or government-imposed barriers (licenses, permits, patents).
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is the result of a firm conforming to the perfect competition model?
- The firm is a price taker, which means it is a seller that has no control over the price of the product.
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What determines price in perfect competition?
- Market Demand and Market Supply
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D
S
Exhibit 1(a) Market Supply and Demand
E
Price per unit (dollars)
0
20
40
60
70
80
100
120
140
Quantity of Output (thousands of units per hour)
100
Market Supply
Market Demand
20
40
60
80
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What determines the individual firm’s demand curve?
- A horizontal line at the market price
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40
20
2
4
100
120
130
6
8
10
D
Exhibit 1(b) Individual firm demand
Price per unit (dollars)
Quantity of output (units per hour)
60
70
80
0
Demand
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Why is this horizontal line the firm’s demand curve?
- If the firm charges more than this price, it will not sell anything, and it has no incentive to charge less than this price
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Why is the firm’s demand curve horizontal at the market price?
- Because the firm can sell all it produces at the market price
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Why does the firm have no incentive to charge less than the market price?
- It can sell everything it brings to market at the market price
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What does the perfectly competitive firm control?
- As a price taker, the only thing the firm controls is how many units it produces
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How many units should this firm produce?
- The number of units that will maximize its profits, or minimize its losses
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What are the two methods to determine how many units to produce?
- TR and TC method
- MR and MC method
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Using the total revenue-total cost method, where should a firm produce?
- Where the distance between TR and TC is the greatest
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 3(a) Total Revenue and Total Cost
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Exhibit 3(b) Profit or loss
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What is
marginal revenue (MR)?
MR = TR / 1 output
∆
∆
The change in total revenue from the sale of one additional unit of output.
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- The change in total cost from the sale of one unit of output.
What is
marginal cost (MC)?
MC = TC / 1 output
∆
∆
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Using the marginal revenue and marginal cost method, where should a firm produce?
MR = MC
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Why should a firm continue to produce as long as MR > MC?
- As long as MR is greater than MC, profit is being made on that last unit produced and sold.
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Why will a firm not produce any unit where MR < MC?
- At any unit of output where MR < MC, the firm incurs a loss.
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Exhibit 4(a) Price, Marginal Revenue, and Cost per Unit
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Exhibit 4(b) Profit or loss
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Exhibit 5 Short-Run Loss Minimization Using the Marginal Revenue Equals Marginal Cost Method for a Perfectly Competitive Firm
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Price (MR) is below minimum average variable cost
Firm will shut down
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What is the perfectly competitive firm’s short-run supply curve?
- The firm’s marginal cost curve above the minimum point on its average variable cost curve
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Exhibit 6 The Short-Run Shutdown Point for a Perfectly Competitive Firm
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What is the perfectly competitive industry’s supply curve?
- The horizontal summation of the MC curves of all firms in the industry above that lie above the minimum point on their AVC curves.
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Exhibit 7 The Firm’s Short-Run Supply Curve
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Exhibit 8 Deriving the Industry Short-Run Supply Curve
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Exhibit 9(a) Individual Short-Run Competitive Equilibrium
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40
Exhibit 9(b) Industry Short-Run Competitive Equilibrium
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What is a normal profit?
- The minimum profit necessary to keep a firm in operation
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In the long-run, what happens when economic profits are made?
- When firms make more than a normal profit, firms enter the industry; as supply increases, a downward pressure is put on prices
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In the long-run, what happens when losses are made?
- When firms make less than a normal profit, firms leave the industry; as supply decreases, an upward pressure is put on prices
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In the long-run, where is equilibrium?
- At the market price that enables firms to make a normal profit
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60
45
30
15
1
2
3
4
75
90
105
5
6
7
8
9
SRATC
LRAC
SRMC
MR
Exhibit 10 Long-Run Perfectly Competitive Equilibrium
E
Quantity of Output (units per hour)
Price and cost per unit (dollars)
0
10
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What equality exists at long-run perfectly competitive equilibrium?
P=MR=SRMC=SRATC=LRAC
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What different types of industries can exist in the long-run?
- Constant-cost
- Decreasing-cost
- Increasing-cost
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What is a
constant-cost industry?
- An industry in which the expansion of industry output by the entry of new firms has no effect on the firm’s cost curves
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What does the long-run supply curve look like in a constant-cost industry?
- It is perfectly elastic, which is horizontal
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Increase in demand sets a
higher equilibrium price
Entry of new firms
increases supply
Initial equilibrium
price is restored
Perfectly elastic long-run
supply curve
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is a decreasing-cost industry?
- An industry in which the expansion of industry output by the entry of new firms decreases the firm’s cost curves
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What does the long-run supply curve look like in a decreasing-cost industry?
- It is downward sloping
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Increase in demand sets a
higher equilibrium price
Entry of new firms
increases supply
Equilibrium price
and ATC decrease
Downward sloping long-run
supply curve
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© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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What is an increasing-cost industry?
- An industry in which the expansion of industry output by the entry of new firms increases the firm’s cost curves
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What does the long-run supply curve look like in a increasing-cost industry?
- It is upward sloping
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Increase in demand sets a
higher equilibrium price
Entry of new firms
increases supply
Equilibrium price
and ATC increase
Upward sloping long-run
supply curve
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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