Download Perfect Competition and Efficiency

Unit 3:
Costs of Production and
Perfect Competition
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ACDC Leadership 2015
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NAME THAT CONCEPT
1.Law of Demin.
Marginal Returns
2.Fixed Cost
3.Low Barriers
4.Price Taker
5.MR = MC
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NAME THAT CONCEPT
1.Variable Costs
2.Shut Down Rule
3.MR=D=AR=P
4.Normal Profit
5.Economies of Scale
(Mr. Darp)
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ACDC Leadership 2015
Review
1. Draw and label a perfectly competitive firm
making a profit
2. Draw and label a perfectly competitive firm
making a loss
3. Why is that firm considered a “price taker”?
4. How do firms determine what output to
produce?
5. On your graph, identify the shut down point
6. On your graph, identify the firms supply curve
7. What happens in the industry if there is a
profit?
8. What happens in the industry if there is a loss?
9. List 10 rides at Disneyland
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Four Market Structures
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Imperfect Competition
Characteristics of Perfect Competition:
Examples: Corn, Strawberries, Milk, etc.
• Many small firms
• Identical products (perfect substitutes)
• Low Barriers- Easy for firms to enter and
exit the industry
• Seller has no need to advertise
• Firms are “Price Takers”
The seller has NO control over price.
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Shifting Cost
Curves
A change in fixed costs change ATC
and AFC (but not MC)
A change in variable costs change
ATC, AVC, and MC
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Changes in fixed
costs don’t
change output
Changes in variable costs change
output
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Efficiency
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In general, efficiency is the optimal use
of societies scarce resources
•Perfect Competition forces producers to use
limited resources to their fullest.
•Inefficient firms have higher costs and are the
first to leave the industry.
•Perfectly competitive industries are extremely
efficient
There are two kinds of efficiency:
1. Productive Efficiency
2. Allocative Efficiency
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Productive Efficiency- Producing at the
lowest possible cost (minimum amount
of resources are being used)
Graphically it is where price equals the
minimum ATC
Allocative Efficiency- Producing at the
amount most desired by society
(allocating resources towards the
products society wants)
Graphically it is where price equals
marginal cost
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Short-Run Profit
P
Not Productively Efficient
MC
MR=D=AR=P
ATC
$10
Q1
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Notice that Q1 is NOT
being made at the
lowest possible cost
(ATC not at lowest
Q
point).
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Short-Run Loss
P
Not Productively Efficient
MC
ATC
MR=D=AR=P
$5
Q2
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Notice that Q2 is NOT
being made at the
lowest possible cost
(ATC not at lowest
Q
point).
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Long-Run Equilibrium
P
Productively Efficient in the Long-Run
MC
ATC
$8
MR=D=AR=P
Q3
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In the long-run, Q2 IS
being made at the
lowest possible cost
(ATC at lowest point)
Q
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Short-Run Profit
P
Allocatively Efficient
MC
MR=D=AR=P
ATC
$10
Q1
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Notice that the price
people are willing to
pay equals the
additional cost to
Q
produce Q1
(Price = MC)
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Short-Run Profit
P
NOT Allocatively Efficient
MC
MR=D=AR=P
ATC
$10
$5
At Q2, the price is greater
than the MC so society
wants more output
produced
Q2
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Q
16
Long-Run Equilibrium
P
MC
ATC
$8
MR=D=AR=P
Q3
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A perfectly
competitive profit
maximizing firm is
always allocatively
Q
efficient
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Summary
Perfectly competitive firms are
allocatively and productively
efficient in the long-run
In the short-run, they are always
allocatively efficient, but they are
not productively efficient.
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