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Perfect Competition
Econ 10
Holmes
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Road Map
Costs
Graphs
Definition
Tables
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DefinitionPerfect Competition is the Industry Structure characterized by •many, many firms•each firm has no independent effect on the market price (price taker)•homogeneous goods•perfectly elastic demand (for a particular firm’s good)
Common examples:produce stand
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The demand for a particular firm’s good
Market(Tomatoes) S
D
d
Firm(Farmer Joe’s Tomatoes)
P$
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Road Map
Costs
Graphs
Definition
Tables
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Perfect Competition:Generic Cost Curves
Q
$
AVC
ATC
MC
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Perfect Competition:Condition I: P>ATC
Q
$
AVC
ATC
MC
D
Wheredoes P=MC?
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Perfect Competition:Condition I: P>ATC
Q
$
AVC
ATC
MC
D
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Perfect Competition:Condition I: P>ATC
Q
$
AVC
ATC
MC
DTR
TC
PROFIT
P>ATC==> ProfitP>AVC==> Stay Open
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Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVC
ATC
MC
DWheredoesP=MC?
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Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVC
ATC
MC
D
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Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVC
ATC
MC
D
LOSS
TVC
TFCTC
P<ATC==> LossP>AVC==> Stay Open
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Perfect Competition:Condition III: P<AVC
Q
$
AVC
ATC
MC
D
WheredoesP=MC?
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Perfect Competition:Condition III: P<AVC
Q
$
AVC
ATC
MC
D
WheredoesP=MC?
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Perfect Competition:Condition III: P<AVC
Q
$
AVC
ATC
MC
D
TC
TVC
TFCLOSS if firmproduces
P<ATC==> LossP<AVC==> Better to close
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Two ways to figure “I should shut down”
LOSSTFC )( TCTRTFC
TRTCTFC
TRTVCTFCTFC
TVCTR
Continue to operate if….
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Road Map
Costs
Graphs
Definition
Tables
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Tables
Remember when we did all those cost tables?MP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15Now, in order to determine where the firm should operate, need to know... P=$4Where does P=MC?A: Q=17Profit = TR- TC = $4 * 17 - 63 = 68-63 = 5Firm should (obviously) not shut down.
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TablesCondition I
MP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15, P=$4Note that (indeed, just as we claimed) profit is maximized at P=MC. TR TC Profit
16 27 -1140 39 156 51 568 63 576 75 1
Why is here better than here?
Answer: normal profit/opp cost
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Perfect Competition:Condition I: P>ATC
Q
$
AVC
ATC
MC
DTR
TC
PROFIT
P>ATC==> ProfitP>AVC==> Stay Open
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TablesCondition II
MP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15, P = $3
Profit is maximized at the largest Q where P=MC.TR TC Profit12 27 -1530 39 -942 51 -951 63 -1257 75 -18
Compare here and here (P=MC at both)
Suppose P = $3
P=MC at Q=14==> profit = 42 - 51 = -9 (loss of 9)but stay open (9<15)
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Perfect Competition:Condition II: AVC< P < ATC
Q
$
AVC
ATC
MC
D
TC
TR
LOSS
P<ATC==> LossP>AVC==> Stay Open
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TablesCondition IIIMP TVC TC AVC ATC MC4 12 27 3 6.75 36 24 39 2.4 3.9 24 36 51 2.571429 3.642857 33 48 63 2.823529 3.705882 42 60 75 3.157895 3.947368 6
N Q1 42 103 144 175 19
W=$12, TFC=$15, P = $2
Suppose P = $2
P=MC at Q=10==> profit = 20 - 39 = -19 (loss of 19)Now should close (19>15)
Note that1. Loss at Q>0 where P=MC > TFC2. TR<TVC
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Perfect Competition:Condition III: P<AVC
Q
$
AVC
ATC
MC
D
TC
TR
LOSS
P<ATC==> LossP<AVC==> Better to close
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Road Map
Costs
Graphs
Definition
Tables
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Your TurnN Q1 32 73 104 125 13
Wage = $24, TFC = $60, P =$12
What is best Q>0? Profit/loss at this Q? Should firm shut down? Sketch the graph.
N Q1 52 153 304 405 45
Wage = $30, TFC=$60,P=$3
What if TFC = $110? What does this do to the best Q>0 and the shutdown decision?