af9f21c987f5404a37eb6d2059248eec_f 13 competition (6).pptx

8/9/2019 af9f21c987f5404a37eb6d2059248eec_f 13 Competition (6).pptx

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The Cost Side of the Market


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Objectives:At the completion of this section, the student should

1. understand the role of cost in determining firmsupply.

2. understand the importance and relationship of

the various firmlevel costs.!. "e a"le to construct and manipulate the market

and firm graphs for a perfectly competitive firm.

#. understand the source and importance ofproducer surplus.


3/24

Cost

$esources given up to get product readyfor sale %&plicit cost '( paid)

*mplicit cost 'opportunity cost)

Total Cost vs Marginal Cost '+TC-)

Average Cost '+TC-) vs Marginal cost

/rofit is goal /rofit + Total $evenue 0 Total Cost

/rofit Contri"ution of last unit + M$ MC


4/24

Cost %&ample

o much effort does it take to get a goodgrade3

Time 4rade Marginal Cost Ave cst-pt.

! 56

# 78

5 98

18 96

1# 97

22 188

!-56 +.8# hrs-pt

'#!)-'7856) +.2 hrs-pt

'5#)-'9878) +.! hrs-pt

'185)-'9698) +. hrs-pt'1#18)-'9796) +1.! hrs-pt

'221#)-'18897) +# hrs-pt

.8# h-pt

.86 h-pt

.87 h-pt

.11 h-pt.1# h-pt

.22 h-pt


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4raphically

8 28 #8 8 78 1888

8.6

1

1.6

2

2.6! Marginal

Cost

Points on Test

Hours/point


6/24

4raphically

/

MC

/ '+;emand)

e

Marginal Cost 'MC) upard sloping due to diminishing returns

4iven price, choose esuch that MC + /


7/24

=irm Cost Curves

*f MC > AC, AC falling

*f MC + AC, AC is not changing

*f MC ? AC, AC rising

Ave t 168Add person eighing128

Ave t @@@@@@'up-;n)

Ave t 168Add person eighing 168

Ave t @@@@@@'up-;n)

Ave t 168Add person eighing 178

Ave t @@@@@@'up-;n)


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Average Cost and Marginal Cost

/attern1. Bo , AC high: firm is

inefficient

2. As rises, MC lo pulls

AC don!. *f MC and AC are the

same, AC does notchange ith

#. %ventually, rising MC ?

AC+? AC starts rising.

6. The same pattern appliesto Average Total Cost

8 6 18 16 28 26 !8 !6 #8 #6 688

68

188

168

Firm Demand and Costs

Marg Cst

Ave ar Cst

Ave Tot Cst Quantity

Price

1 2 3 4


9/24

Cost /ro"lem

*n order to do this pro"lem on the computer, hold theCT$B don and dou"le click on the icon "elo. Then clickon the D/ro"lemE ta" on the spreadsheet.

68

68

68

68

68

!68

688

88

568

968

1268

6

2.6

1.5

1.26

1

8.7!

!8

22.6

17.!

15.6

17

28

!6

26

28

17.56

19

28.7!

16

18

16

28

!8

28

28

28

28

28

288

#88

88

788

1888

1288

28

28

28

28

28

168

188

8

68

68

68

6

18

6

8

18


10/24

18

Competitive Market

ar!et

Fou

Gther =irms

"mpersona# Price Ta!er

$ntry inresponse

to pro%it

potentia#


11/24

11

Monopoly Market

ar!et

Fou

&arriers to entry Contro# o% price 'on( term pro%it potentia#


12/24

12

$esponse to Competitive Market:


13/24

1!

$esponse to Competitive Market:4roth, Mergers, AcHuisitions

ar!et

Fou

Gther =irms

Cost advanta(e

$conomies o% sca#e Contro# o%

esources )et*or! economies

FouFouFou


14/24

1#

"nternet $%%ect on Competitive ar!et

ar!et

Gther =irms

'ar(er ar!et

ore Competitors ore Competitive

Fou


15/24

16

"nternet $%%ect on Competitive ar!et

ar!et

Fou

Gther =irms

ore Competitors

'ar(er ar!et ore Competitive

FouFouFou


16/24

=irst: Market StructurePer%ect Competition

Many Small Iuyers


17/24

Competitive Market

Many small "uyers no "uyer can affect the price as their purchase

changes "y such a small percentage.

Many sellers of the same 'homogeneous)product no seller can affect price as their sales are

such a small percentage of . Many su"stitutes means that price elasticity is

very high in the limit elasticity + J 'horiKontal ;emand)


18/24

Competitive Market '**)

Homo(eneous Product Su"stitutes are perfect *f your raise the price, all customers leave

*f you loer price, you are overhelmed Free $ntry and $it

/rofits and Bosses induce entry and e&it Lith entry, Market Supply rises /rice falls

Lith %&it, Market Supply falls /rice rises Per%ect "n%ormation


19/24

*ndustry

Market demand Collection of firm decisions determines

Supply %Huili"rium price set Total %Huili"rium uantity set For Competition+ Firm assumes mar!et

resu#ts speci%ica##y eui#ibrium price'1 graph for the industry and 1 graph

for firm)


20/24

Market /rice is the ;emand and Marginal $evenue curves for the firm.Marginal Cost is the firmNs supply curve.*ndustry 'market) supply is sum of firm supply curves.%ntry and e&it in response to profits or losses moves the *ndustry supply curve.Gther factors: technology, input prices, e&pectations.


21/24

=irm ;ecision /rocess

o Much3 MC + M$ +? O

4iven O: / set on demand curve Ave. Total Cost determined from ATC Ave. ar. Cost determined from AC Ave. =i&ed Cost + ATC 0 AC

Lhether3 *f /rice ? Ave. ar. Cost, net cash flo is P

So produceQ"etter off producing than not


22/24

Lhy and o %fficiency3

Lhy is market eHuili"rium "est3 Ma&imum surplus

Iuyers and Sellers satisfied

%ffects of restrictions /rice ceilings

/rice floors

Ta&es and Su"sidies

/rice vs nonprice allocation


23/24

Competition *mplications

Bong $un /rofits are Kero ;ue to entry and e&it

Ma&imum surplus 'producer P consumer)

/rice serves as signal for resourceallocation

/resumed hen Dinvisi"le handE invoked

May not give D"estE distri"ution or output /u"lic goods, e&ternalities, eHuity


24/24

Market /rice is the ;emand and Marginal $evenue curves for the firm.Marginal Cost is the firmNs supply curve.*ndustry 'market) supply is sum of firm supply curves.%ntry and e&it in response to profits or losses moves the *ndustry supply curve.Gther factors: technology, input prices, e&pectations.

Competitive ar!et5 Practice

1. /osition mouse on picture

2. old don CT$B!. Beft dou"le click mouse

af9f21c987f5404a37eb6d2059248eec_f 13 competition (6).pptx

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