1. many buyers and sellers in the market
DESCRIPTION
wheat. memory. modules. Competitive Markets. Characteristics of Perfectly Competitive Markets. 1. Many buyers and sellers in the market. 2. Buying and selling nearly identical goods. and services. 3. Firms can freely enter and exit the market. dowels. direct cremations. - PowerPoint PPT PresentationTRANSCRIPT
1. Many buyers and sellers in the market
2. Buying and selling nearly identical goodsand services
3. Firms can freely enter and exit the market
wheat
dowels direct cremations
Competitive Markets
memory
Characteristics of Perfectly Competitive Markets
modules
D
Pe=75
S
PMM
QMM (thou. per year)
Qe
DWDP=75
PMM
QMM
Market for Memory Modules
Demand for Western Digital
Memory Modules
Individual firms are price-takers
Too small to ΔS
quickly switch if P Consumers would
(millions per year)
Western Digital Memory Modules
Total Revenue (TR) = Price (P) * Quantity (Q)
Being a price-taker, WD can’t change
Hence, ΔTR = P * ΔQ
Dividing both sides by ΔQ yields
ΔTR
ΔQ= P
Marginal revenue (MR)—the additional revenue from selling one additional unit
For perfectly competitive firms, MR equals price (not true for firms in less than competitive markets).
Cost Curves of Parsons’ Mill
ATC
AVC
MC
Cost($ per bundle)
Quantity (bundles of dowels per day)
ATC reaches its minimum
where MC=ATC
Dist=AFC, which is larger at lower Q
2.80
1.25
125 142
ATC
AVC
MC
Cost($ per bundle)
Quantity (bundles of dowels per day)
2.80
1.25
125142
D$4
SPD
QD
If , what is QπMax ?
4.00
Q’
MR=P>MC(Q’)
QπMax
Δπ from Q from Q=142 to QπMax
Hence, the profit maximizing output level (QπMax) occurs where MR=MC.
If MR > MC then firms can econ π by Q
(=P for perfectly competitive firms)
If MR < MC then firms can econ π by Q
(=P for perfectly competitive firms)
For perfectly competitive firms, QπMax occurs where MR=P=MC.
ATC
AVC
MC
Cost($ per bundle)
Quantity (bundles of dowels per day)
2.80
1.25
125 142
PMKT=4.00
To find QπMax for perfectly competitive firms, go from PMKT over to the MC curve and down.
QπMax≈ 155
ATC
AVC
MC
Cost($ per bundle)
Quantity (bundles of dowels per day)
QπMax≈ 155
PMKT=4.00
To find average total cost, go from QπMax up to the ATC curve and over to the vertical axis
ATC(Q=155)
ATC
AVC
Cost($ per bundle)
Quantity (bundles of dowels per day)
QπMax≈ 155
PMKT=4.00
ATC(Q=155)
A
B
Total Revenue = PMKT* QπMax
Height of rectangle A+BBase of rectangle A+B
= area A+B
Total Cost = ATC(Q=155) * QπMax
MCEcon π = TR − TC = area A
= area B
ATC
AVC
Cost($ per bundle)
Quantity (bundles of dowels per day)
Suppose PMKT=$2
QπMax
PMKT=2
ATC(QπMax)
MC
AVC(QπMax)
A
B
C
TR=B+CTC=A+B+CEcon Losses= A
Because TR=B+C > TVC=C by B, which can be applied against the TFC of A+B. Shutting down would produce econ losses = TFC
If Parsons’ Mill is suffering econ losses, why does it produce in the short-run?
AFC(QπMax)
MC
Cost($ per bundle)
Quantity (bundles of dowels per day)
PSD=1.25
125
P<PSD
shutdown
P>PSD
Produce where P=MC
TR<TVC at all Q>0
ATC
AVC
SShort-run
Supply curve of a perfectly competitive firm equals the MC curve above the shutdown price.
“A year after Lewontin was fired, Parsons closed the mill.”
D
Pe
S1
PD
QDQe
Market for Wooden Dowels
Saunders with dowelsJosh
North Waterford, Maine
Parsons’ Mill
QD(millions…) (thous…)
1
1 QπMax
ATC
AVC
MCShort-run produce b/c P > min AVCLong-run exit b/c econ losses
S2
Pe2
Qe2
D
PD
QD
Market for Wooden Dowels
QD(millions…) (thous…)
QπMax
ATC
AVC
MCS2
Pe2
Qe2
Reaching Long-Run Equilibrium
Typical Mill: Econ π < 0
Some Mills Exit in LR
Supply P until Typical Mill’s econ π = 0
Pe2
= min ATC
SLong-Run
SUPPLY CURVE IN A COMPETITIVE MARKET
The Supply Curve of an Individual Firm
Short-run: the MC curve above AVC
Market Supply = ∑Individual Supply Curves
PD
QD
Parsons’ Mill
SP’
QPM
PD
QD
Saunders’ Brothers
SP’
QSB
• • •
PD
QD
Market
SP’
(QPM+QSB+ • • •)
Let’s call it a Premium Club (PC)
Known within the health club industry as a (no-frills) keycard club (KC)
“You typically won't see space-intensive amenities such as pools, racquetball courts or steam rooms at [keycard clubs]. Some don't even have locker rooms. Instead what you'll find is a surplus of cardio machines in a small space and 24-hour access.”
Smaller Gyms Show MuscleLower-cost chains may be financially fitter for expansion
The “popularity” of the keycard clubs “is soaring as the recession drives people to spend less. And the newer gyms have emerged against a backdrop of shifts within the industry, including bankruptcy filings by some of the [premium gyms].
Average Total Cost($ per month)
ATC
PCATC
KC
Pennsylvania Hospital University of Pennsylvania Hospital
Point-to-Point Carrier Hub Carrier
Hubs
Suppose the markets for keycard clubs (KC) and premium clubs (PC) were in equilibrium prior to the recent recession. Illustrate the effect of the recession on these markets and describe the long-run adjustment process.