chapter 10
DESCRIPTION
chapterTRANSCRIPT
Chapter 10
Pure Compe**on in the Short Run
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10-‐2
Four Market Models
• Pure compe**on • Pure monopoly • Monopolis*c compe**on • Oligopoly
Pure Compe**on
Monopolis*c Compe**on
Oligopoly Pure
Monopoly
Market Structure Con*nuum
LO1
10-‐3
Four Market Models Characteris*cs of the Four Basic Market Models
Characteris*c Pure
Compe**on Monopolis*c Compe**on Oligopoly Monopoly
Number of firms A very large number
Many Few One
Type of product Standardized DifferenGated Standardized or differenGated
Unique; no close subs.
Control over price None Some, but within rather narrow limits
Limited by mutual inter-‐dependence; considerable with collusion
Considerable
CondiGons of entry Very easy, no obstacles
RelaGvely easy Significant obstacles Blocked
Nonprice CompeGGon
None Considerable emphasis on adverGsing, brand names, trademarks
Typically a great deal, parGcularly with product differenGaGon
Mostly public relaGon adverGsing
Examples Agriculture Retail trade, dresses, shoes Steel, auto, farm implements
Local uGliGes
10-‐4
Pure Competition: Characteristics
• Very large numbers of sellers • Standardized product • “Price takers” • Easy entry and exit
LO2
10-‐5
Purely Competitive Demand
• Perfectly elasGc demand • Firm produces as much or liXle as they wish at the market price • Demand graphs as horizontal line
LO3
10-‐6
Average, Total, and Marginal Revenue
• Average revenue • Revenue per unit • AR = TR/Q = P
• Total revenue • TR = P X Q
• Marginal revenue • Extra revenue from 1 more unit • MR = ΔTR/ΔQ
LO3
10-‐7
Average, Total, and Marginal Revenue
4 2 6 8 10 12
$1179
131
262
524
655
786
917
1048
393
TR
D = MR = AR
Quan*ty demanded (sold)
Price an
d revenu
e
Firm’s Demand Schedule (Average Revenue)
Firm’s Revenue Data
P QD TR MR
$131 131 131 131 131 131 131 131 131 131 131
0 1 2 3 4 5 6 7 8 9 10
$0 131 262 393 524 655 786 917
1048 1179 1310
$131 131 131 131 131 131 131 131 131 131
] ] ] ] ] ] ] ] ] ]
10-‐8
Profit Maximization: TR – TC Approach
• The compeGGve producer will ask three quesGons • Should the firm produce? • If so, in what amount? • What economic profit (loss) will be realized?
LO4
10-‐9
Profit Maximization: TR-TC Approach
LO3
The Profit-‐Maximizing Output for a Purely Compe**ve Firm: Total Revenue – Total Cost Approach (Price = $131)
(1) Total Product (Output) (Q)
(2) Total Fixed Cost
(TFC)
(3) Total Variable Costs (TVC)
(4) Total Cost
(TC)
(5) Total Revenue
(TR)
(6) Profit (+) or Loss (-‐)
0 $100 $0 $100 $0 $-‐100
1 100 90 190 131 -‐59
2 100 170 270 262 -‐8
3 100 240 340 393 +53
4 100 300 400 524 +124
5 100 370 470 655 +185
6 100 450 550 786 +236
7 100 540 640 917 +277
8 100 650 750 1048 +298
9 100 780 880 1179 +299
10 100 930 1030 1310 +280
10-‐10
Profit Maximization: TR–TC Approach
1 0 2 3 4 5 6 7 8 9 10 11 12 13 14
1 0 2 3 4 5 6 7 8 9 10 11 12 13 14
$1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100
$500 400 300 200 100
Total reven
ue and
total cost
Total econo
mic
profi
t
Quan*ty demanded (sold)
Quan*ty demanded (sold)
Total revenue, (TR)
Break-‐even point (Normal profit)
Break-‐even point (Normal profit)
Maximum economic profit $299
Total economic profit
$299
P=$131
Total cost, (TC)
LO4
10-‐11
Profit Maximization: MR-MC Approach
LO3
The Profit-‐Maximizing Output for a Purely Compe**ve Firm: Marginal Revenue – Marginal Cost Approach (Price = $131)
(1) Total
Product (Output)
(2) Average Fixed Cost (AFC)
(3) Average
Variable Costs (AVC)
(4) Average Total
Cost (ATC)
(5) Marginal Cost
(MC)
(5) Price = Marginal Revenue (MR)
(6) Total
Economic Profit (+) or Loss (-‐)
0 $-‐100
1 $100.00 $90.00 $190 $90 $131 -‐59
2 50.00 85.00 135 80 131 -‐8
3 33.33 80.00 113.33 70 131 +53
4 25.00 75.00 100.00 60 131 +124
5 20.00 74.00 94.00 70 131 +185
6 16.67 75.00 91.67 80 131 +236
7 14.29 77.14 91.43 90 131 +277
8 12.50 81.25 93.75 110 131 +298
9 11.11 86.67 97.78 130 131 +299
10 10.00 93.00 103.00 150 131 +280
10-‐12
Profit Maximization: MR-MC Approach Co
st and
revenu
e
$200
150
100
50
0 1 2 3 4 5 6 7 8 9 10
Output
Economic profit MR = P
MC MR = MC
AVC
ATC
P=$131
A=$97.78
LO5
10-‐13
Loss-Minimizing Case
• Loss minimizaGon • SGll produce because MR > minimum AVC • Losses at a minimum where MR = MC • Producing adds more to revenue than to costs
LO5
10-‐14
Loss-Minimizing Case Co
st and
revenu
e
$200
150
100
50
0 1 2 3 4 5 6 7 8 9 10
Output
Loss
MR = P
MC
AVC
ATC
P=$81
A=$91.67
V = $75
LO5
10-‐15
Shutdown Case Co
st and
revenu
e
$200
150
100
50
0 1 2 3 4 5 6 7 8 9 10
Output
MR = P
MC
AVC ATC
P=$71
V = $74
Short-‐run shut down point P < minimum AVC
$71 < $74
LO5
10-‐16
Marginal Cost and Short Run Supply
The Supply Schedule of a Compe**ve Firm Confronted with Cost Data from Table
Price Quan*ty Supplied
Maximum Profit (+) Minimum Loss (-‐)
$151 10 $+480
131 9 +299
111 8 +138
91 7 -‐3
81 6 -‐64
71 0 -‐100
61 0 -‐100
LO6
10-‐17
Marginal Cost and Short-Run Supply
P1
0
Cost and
revenu
es (d
ollars)
Quan*ty supplied
MR1
P2 MR2
P3 MR3
P4 MR4
P5 MR5
MC
AVC
ATC
Q2 Q3 Q4 Q5
a b
c
d
e
LO6
10-‐18
Marginal Cost and Short-Run Supply
P1
0
Cost and
revenu
es (d
ollars)
Quan*ty supplied
MR1
P2 MR2
P3 MR3
P4 MR4
P5 MR5
MC
AVC
ATC
Q2 Q3 Q4 Q5
a b
c
d
e
S
Shut-‐down point (If P is below)
LO6
10-‐19
3 Production Questions
LO3
Output Determina*on in Pure Compe**on in the Short Run
Ques*on Answer
Should this firm produce? Yes, if price is equal to, or greater than, minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost.
What quanGty should this firm produce? Produce where MR (=P) = MC; there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized.
Will producGon result in economic profit? Yes, if price exceeds average total cost (TR will exceed TC). No, if average total cost exceeds price (TC will exceed TR).
LO6
10-‐20
Firm and Industry: Equilibrium
LO4
Firm and Market Supply and Market Demand
(1) Quan*ty Supplied, Single Firm
(2) Total
Quan*ty Supplied, 1000 Firms
(3) Product Price
(4) Total
Quan*ty Demanded
10 10,000 $151 4000
9 9000 131 6000
8 8000 111 8000
7 7000 91 9000
6 6000 81 11,000
0 0 71 13,000
0 0 61 16,000
LO6
10-‐21
Firm versus Industry: Equilibrium
Economic profit
d ATC
AVC
s = MC
$111 $111
D
S = ∑ MC’s
8 8000
LO6
10-‐22
Fixed Costs: Digging Out of a Hole
• Shukng down in the short run does not mean shukng down forever
• Low prices can be temporary • Some firms switch producGon on and off depending on the market price
• Examples: oil producers, resorts, and firms that shut down during a recession