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Transcript
Session 7 Perfect Competition
Outline
Chapter 8 in the text
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This image
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slide “Lecture Outline”
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
Wal-Mart engaging in price competition
Outline
CHAPTER 8
•PRICING WARS ARE AN EXAMPLE OF
COMPETITION AMONG FIRMS
•Wal-Mart Fires the First Shot in Holiday-Toy
Pricing War
In late September, a full three months before
Christmas, and a month before hot holiday items
normally are promoted, Wal-Mart Stores slashed
the price on Fisher-Price's newest dancing doll to
$19.46 -- a stunning 22% discount to the Toys "R"
Us price of $24.99.
•The steep and early price cuts are roiling the
industry. Yesterday, Toys "R" Us acknowledged
Wal-Mart's moves caught it by surprise and hurt its
third-quarter results.
• Source: Ann Zimmerman, Joseph Pereira and
Queena Sook Kim. Wall Street Journal (Eastern
edition). New York, N.Y.: Nov 19, 2003. p. B.1
E-tailing
Source: WSJ 12/8/03
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
2
END
eBay as a source of price information
Outline
For years, eBay Inc. has let its users buy and
sell almost anything. Now it wants to become
the blue book for just about everything.
Earlier this year, the auction Web site quietly
began selling to other companies huge volumes
of data related to the site's auctions. Among
the hottest data for sale: the average selling
prices on eBay of all kinds of products, from
Sony DVD players to Ford Explorers.
EBay is making the push at a time when its site
has grown monstrously large, with enough
auctions of items across various categories that
the company says it can provide representative
market prices.
eBay is a source of price information for
consumers and makes sellers price products
competitively. This information contributes to
making the demand curves facing the firms be
horizontal.
Source: WSJ 12/8/03 At eBay Even Sales Prices are for Sale, By Nick
Wingfield
Outline
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
3
END
Session 7 Lecture Outline: Perfect Competition
Outline
1.0 First Slide
2.0 The Market Structure of Perfect Competition
3.0 Profit Maximization
4.0 Break Even and Shut Down Points
5.0 Supply Curve
6.0 Demand Shifts
7.0 Efficiency
Last Slide: Review
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
4
END
2.0 Market Structure
Outline
2.1 Terminology
2.2 Perfect Competition
2.3 Market Structure Matrix
2.4 Summary of Formulas
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
2.1 Market Structure Terminology
Outline
Key Characteristics Describing Market
Structure
Number of suppliers
• Many or few
Product’s degree of uniformity
• Do firms in the market supply identical products or are
there differences across firms?
The ease of entry into the market
• Can new firms enter easily or are they blocked by natural
or artificial barriers?
Control over Price
Outline
• Do sellers have full control over the selling price?
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
6
END
2.2 The Perfectly Competitive Market Structure
Outline
Perfect Competition
Many buyers and sellers  so many that each buys
and sells only a tiny fraction of the total amount
exchanged in the market
Firms sell a standardized or homogeneous product
Sellers has no control over price, is a price taker, it
is determined by the market.
Firms and resources are freely mobile  over time
they can easily enter or leave the industry
Outline
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
7
END
2.3 Market Structure Matrix
Outline
# of suppliers Product
Entry/Exit
Standardized
Control over
Price
Perfect
Competition
(Session 7)
Many
Yes
Very easy
None
Monopoly
(Session 8)
One
Unique, no
close
substitutes
Blocked
Considerable
Monopolistic Many
Competition
(Session 9)
Not much as
much
differences as
they want you
to think
Relatively
easy
Some, but
within narrow
limits
Oligopoly
(Session 9)
Not much
Significant
obstacles
Limited by
interdependence,
but considerable
with collusion
Few
8
2.4 Summary of Formulas
Outline
Profit = TR – TC
REVENUE:
Total Revenue: TR = q  p
Average Revenue: AR = TR / q
Marginal Revenue: MR = TR/ q
COST:
Outline
Total Cost: TC = FC + VC
Average Variable Cost: AVC = VC / q
Average Fixed Cost: AFC = FC / q
Average Total Cost: ATC = TC / q
Marginal Cost: MC=TC/ q
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
9
END
3.0 Profit Maximization
Outline
3.1 Horizontal (price taker)
3.2 Revenue Concepts
3.3 Profit = TR – TC
3.4MR = MC Approach
3.5 Graphically
3.6 Econ Lab
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
3.1 A Graphic Illustrating Market Equilibrium and the
Firm’s Demand Curve in Perfect Competition
Outline
The market price of wheat of $5 per bushel is determined in the left panel by the
intersection of the market demand curve and the market supply curve. Once the market
price is established, any farmer can sell all he or she wants at that market price.
(b) Firm’s Demand
Price per bushel
S
$5
Price per bushel
(a) Market Equilibrium
d
$5
D
Outline
0
Bushels of
1,200,000 wheat per day
Begin 2. Structure
0
3.Profit 4.Shut Down
5
5.Supply
10
Bushels of
15 wheat per day
6.Shifts 7 Eff
11
END
3.2 Revenue Concepts
Outline
The Demand Curve represents the Price each output is sold at.
Marginal Revenue is the change in total revenue attributable to each
additional unit sold.  MR = chg TR / chg q
Because the perfectly competitive firm sells each additional unit at the
same price, the Marginal Revenue Curve is the Demand Curve.
Average Revenue is the ratio of total revenue to total quantity sold. It
represents the average price received for each unit.  AR = TR / q
Because the perfectly competitive firm sells each additional unit at the
same price, the Marginal Revenue Curve is the Average Revenue Curve.
Regardless of the rate of output, the following equality holds along the
firm’s demand curve
Market price = marginal revenue = average revenue
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
12
END
3.3a Profit
Outline
The firm maximizes economic profit by finding the
rate of output at which total revenue (TR) exceeds
total cost (TC) by the greatest amount
Profit = TR - TC
Total revenue is simply output times the price per
unit
TR = P x q
Outline
First will will show from hypothethical data where
the profit maximizing output level is, then we will
show how this can be determined using the
relationship MR = MC
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
13
END
3.3b Profit, Hypothethical Firm
Outline
(1)
(2)
(3) = (1)  (2)
(4)
Bushels of Marginal
Wheat
Revenue
Total
Total
per day (Price)
Revenue
Cost
(q)
(p)
(TR = q  p) (TC)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
-$5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
$0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
$15.00
19.75
23.50
26.50
29.00
31.00
32.50
33.75
35.25
37.25
40.00
43.25
48.00
54.50
64.00
77.50
96.00
(5)
(6) = (4) + (1)
Marginal
Average
Cost
Total Cost
MC=TC/  Q ATC = TC / q
-$4.75
3.75
3.00
2.50
2.00
1.50
1.25
1.50
2.00
2.75
3.25
4.75
6.50
9.50
13.50
18.50
$19.75
11.75
8.83
7.25
6.20
5.42
4.82
4.41
4.14
4.00
3.93
4.00
4.19
4.57
5.17
6.00
(7) = (3) - (4)
Economic
Profit or
Loss = TR - TC
-$15.00
-14.75
-13.50
-11.50
-9.00
-6.00
-2.50
1.25
4.75
7.75
10.00
11.75
12.00
10.50
6.00
-2.50
-16.00
Outline
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
The individual farmer’s
output possibilities
measured in bushels of
wheat per day are
shown in column (1)
Column (2) has the
market price.
Total revenue is in
column (3) = column (1)
 column (2)  P  q
Total cost is shown in
column (4)
Economic Profit is in
column (7) = Total
revenue in column (3)
minus Total cost in
column (4)
6.Shifts 7 Eff
14
END
3.3c: Short-Run Profit Maximization Graph
Outline
(a) Total Revenue Minus Total Cost
At output less than 7 bushels
and greater than 14 bushels,
total cost exceeds total
revenue  economic loss
measured by the vertical
distance between the two
curves.
$60
Maximum economic
profit = $12
48
15
0
Begin 2. Structure
Total revenue
(= $5 × q )
Total dollars
Total revenue exceeds total
cost between 7 and 14 bushels
per day  economic profit is
maximized at the rate of
output of 12 bushels of wheat
per day.
Total cost
5
3.Profit 4.Shut Down
7
10
12
5.Supply
15
Bushels of wheat per day
6.Shifts 7 Eff
15
END
3.4a MC = MR Approach
Outline
The profit-maximizing rate of output occurs where marginal revenue equals
marginal cost
Marginal revenue, MR, is the change in total revenue from selling another unit of
output
MR = TR/ q
Since the firm in perfect competition is a price taker, marginal revenue from
selling one more unit is the market price  MR = P
Marginal cost (MC) is the change in total cost resulting from producing another
unit of output
MC=TC/ Q
The next slide provides an example in a Tables we look for where the output
level where the difference between MR and MC is smallest, and the slide after
that shows the same in a graph
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
16
END
3.4b Hypothethical Firm
Outline
Marginal revenue is
presented in column
(2) while marginal
cost is in column (5).
The firm will
increase quantity
supplied as long as
each additional unit
adds more to total
revenue that to total
cost  as long as
marginal revenue
exceeds marginal
cost.
(1)
(2)
(3) = (1)  (2)
(4)
Bushels of Marginal
Wheat
Revenue
Total
Total
per day (Price)
Revenue
Cost
(q)
(p)
(TR = q  p) (TC)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
-$5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
$0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
(5)
(6) = (4) + (1)
Marginal
Average
Cost
Total Cost
MC=TC/ Q ATC = TC / q
$15.00
19.75
23.50
26.50
29.00
31.00
32.50
33.75
35.25
37.25
40.00
43.25
48.00
54.50
64.00
77.50
96.00
-$4.75
3.75
3.00
2.50
2.00
1.50
1.25
1.50
2.00
2.75
3.25
4.75
6.50
9.50
13.50
18.50

$19.75
11.75
8.83
7.25
6.20
5.42
4.82
4.41
4.14
4.00
3.93
4.00
4.19
4.57
5.17
6.00
(7) = (3) - (4)
Economic
Profit or
Loss = TR - TC
-$15.00
-14.75
-13.50
-11.50
-9.00
-6.00
-2.50
1.25
4.75
7.75
10.00
11.75
12.00
10.50
6.00
-2.50
-16.00
Marginal revenue exceeds marginal cost for the first 12 bushels of wheat.
The farmer, as a profit-maximizer will limit output to 12 bushels per day.
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
17
END
3.5: Profit Maximization Graphically
Outline
The marginal cost curve intersects
the marginal revenue curve at point
e where output is 12 bushels per day.
At rates of output less than 12
bushels, marginal revenue exceeds
marginal cost  firm can increase
profit by expanding output. At
higher rates of output, marginal
cost exceeds marginal revenue 
the firm could increase profit by $5
reducing output.
(b) Marginal Cost Equals Marginal Revenue
Marginal cost
Average total cost
e
= average revenue
Profit
4
0
Begin 2. Structure
a
Dollars per unit
Profit appears in the blue shaded
rectangle. The height of the
rectangle, ae, equals the price of
$5 minus the average cost of $4
 per unit profit of $1 per
bushel.
d = Marginal revenue
5
3.Profit 4.Shut Down
10
12
5.Supply
15
Bushels of wheat per day
6.Shifts 7 Eff
18
END
3.6 Econ Lab
Outline
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
19
END
Click to advance to next slide
Outline
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
20
END
4.0 BREAK EVEN , SHUT DOWN POINTS
Outline
4.1 Shut Down
4.2 Break Even
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
21
END
4.1a Minimizing Short-Run Losses
Outline
Sometimes the price that the firm is
required to “take” will be so low that no rate
of output will yield an economic profit
Faced with losses at all rates of output, the
firm has two options
Outline
It can continue to produce at a loss, or
Temporarily shut down
It cannot exit (go out of business) in the short
run because by definition the short run is a
period too short to allow existing firms to leave
or new firms to enter
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
22
END
4.1b Fixed Cost and Minimizing Losses
Outline
The firm has two types of costs in the short
run
Fixed cost
Variable cost
Outline
A firm that shuts down in the short run must
still pay its fixed costs
But, by producing, a firm’s revenue may
more than cover variable cost  a firm will
produce if the revenue thus generated
exceeds the variable cost of production 
can cover a least a portion of its fixed cost
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
23
END
4.1c Shut Down Decision
Outline
At a price as low as p1, the
firm will shut down rather
than produce at point 1,
because the price is below
average variable cost at all
output rates  the lossminimizing output rate at
a price of p1 is zero as
shown by q1
Average variable cost
2
p2
p1
Dollars per unit
At a price of p2, the firm
will be indifferent between
producing q2 and shutting
down because either way
the loss will equal fixed
cost since the price just
equals average variable
cost. Point 2 is called the
shutdown point.
Marginal cost
d2
d1
1
Shutdown
point
0
q
1
Begin 2. Structure
3.Profit 4.Shut Down
q
q
2
5
5.Supply
Quantity per period
6.Shifts 7 Eff
24
END
4.2 Break-even
Outline
If the price is p3, the firm
will produce q3 to minimize
its loss while at p4, the
fiPowerpoint Lecture
Notesrm will produce q4 to
earn just a normal profit 
p5
the break-even point.
If the price rises to p5, the p
firm will earn a short-run 4
p3
economic profit by
producing q5
p
2
p1
Marginal cost
Break-even
point
5
4
3
d
Average variable cost 4
d3
2
d2
d1
1
In the long run all costs
are variable (i.e. there is
no AFC cueve, and the
Shutdown
AVC is the ATC curve) ,
point
hence in the long run
the break-even point is
0
q
q q q q
the also the shut down
1
2 3 4 5
point
Begin 2. Structure 3.Profit 4.Shut Down 5.Supply
Dollars per unit
d
Average total cost 5
Quantity per period
6.Shifts 7 Eff
25
END
5.0 Supply Curve
Outline
5.1 Firm’s Short Run Supply
5.2 Market Supply
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
5.1a Short-Run Firm Supply Curve
Outline
As long as the price covers average
variable cost, the firm will supply the
quantity resulting from the intersection of
its upward-sloping marginal cost curve and
its marginal revenue, or demand curve
Outline
Thus, that portion of the firm’s marginal
cost curve that intersects and rises above the
lowest point on its average variable cost
curve becomes the short-run firm supply
curve
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
27
END
5.1b: Short-Run Supply Curve
Outline
The quantity supplied when the
price is p2 or higher is
determined by the intersection
of the firm’s marginal cost
curve and its demand or
marginal revenue curve.
The short-run supply
curve is the upwardsloping portion of the
marginal cost curve,
beginning at point 2.
5
p5
4
p4
3
p3
d
Average total cost 5
d
Average variable cost 4
d3
2
p2
p1
Dollars per unit
The solid portion of the
short-run supply curve
indicates the quantity the
firm is willing and able to
supply in the short run at
each alternative price.
Marginal cost
d2
d1
1
0
q
q q q q
2
1
Begin 2. Structure
3.Profit 4.Shut Down
Quantity per period
3 4 5
5.Supply
6.Shifts 7 Eff
28
END
5.2a Aggregating Individual Supply to Form Market
Supply
Outline
Price per unit
(a) Firm A
(b) Firm B
SA
(d) Industry, or market, supply
(c) Firm C
SA+ SB+ SC = S
SC
SB
p'
p'
p'
p'
p
p
p
p
0
10 20
Quantity
per period
0
10 20
Quantity
per period
0
10 20
Quantity
per period
0
30
60
Quantity
per period
The short-run industry supply curve is the horizontal sum of all firms’ short-run supply
curves  horizontal summation of the firm level marginal cost curves
At a price below p, no output is supplied. At a price of p, each of the three firms supplies 10
units, for a market supply of 30 units, and at a price of p', each firm supplies 20 units  the
market supply is 60 units.
Begin 2. Structure
Outline3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
29
END
5.2b Relationship Between Short-Run Profit
Maximization and Market Equilibriuim
Outline
$5
4
(b) Industry, or market
Price per unit
Dollars per unit
(a) Firm
MC = s
ATC
AVC
Profit
d
SMC = S
$5
D
Bushels of wheat
Bushels of wheat
per
day
per day
0
1,200,000
0
5
10 12
If we suppose there are 100,000 identical wheat farmers, their individual supply curves are summed
horizontally to yield the market supply curve which is shown in the right panel where the market price
of $5 is determined. At this price, each farmer produces 12 bushels per day, as shown in the left panel,
for a total quantity supplied of 1,200,000 bushels per day  each farmer earns an economic profit of
$12 per day as shown by the blue shaded rectangle.
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
Outline
6.Shifts 7 Eff
30
END
6.0 Demand Shifts
Outline
6.1 Equilibrium
6.2 Demand Increase
6.3 Demand Decrease
6.4 Practice
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
6.1 Long Run Equilibrium for the Firm and the Industry
Outline
(a) Firm
(b) Industry, or market
S
ATC
LRAC
p
e
d
Price per unit
Dollars per unit
MC
p
D
Quantity per period
Q
0
0
q Quantity per period
In the long run, market supply adjusts as firms enter or leave, or change their size. This process
continues until the market supply intersects the market demand at a price that equals the lowest point
on each firm’s long-run average cost curve  at point e with each firm producing q units. At point e,
marginal cost, short-run average total cost and long-run average cost are all equal.
Begin 2. Structure 3.Profit 4.Shut Down 5.Supply 6.ShiftsOutline
7 Eff 32 END
6.2a: Long-Run Adjustment to an Increase in Demand
Outline
Return to 6.0 Demand Shifts
(b) Industry, or Market
(a) Firm
S
p'
d'
ATC
LRAC
Profit
p
d
Price per unit
Dollars per unit
MC
p'
b
a
p
D'
D
0
q
q'
Quantity
per period
0
Qa
Qb
Quantity
per period
Suppose the initial point of equilibrium is given as point a in the right hand panel where the market
clearing price is p and the market quantity is Qa  the individual firm supplies q units and earns a
normal profit.
Now suppose market demand increases as shown by the shift from D to D'  the market price
increases in the short run to p'. Each firm responds to the higher price by expanding output
Outline
along its short-run supply, or marginal cost curve  the quantity supplied increases to q'
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
33
END
6.2b: Long-Run Adjustment to an Increase in Demand
Outline
Return to 6.0 Demand Shifts
(b) Industry, or Market
(a) Firm
S
S'
p'
d'
ATC
LRAC
p
d
Price per unit
Dollars per unit
MC
p'
b
a
c
S*
p
D'
D
0
q
q'
Quantity
per period
0
Qa
Qb
Qc
Quantity
per period
In the long run, economic profit attracts new firms  additional supply to the market shifting out the
market supply curve  market price to fall. Firms continue to enter as long as they earn economic
profit  the market supply eventually shifts out to S', where it intersects D' at point c, returning price
to its initial equilibrium level, p  the demand curve facing the individual firm shifts back down from
d' to d  firms again earning a normal profit. Even though industry output increases from Qa to Qb,
each firm’s output returns to q  new firms provide the additional output
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts
7 Eff
Outline
34
END
6.3a: Long-Run Adjustment to a Decrease in Demand
Return to 6.0 Demand Shifts
Outline
(a) Firm
(b) Industry, or Market
S
ATC
LRAC
e
p
d
Loss
p"
d"
Price per unit
Dollars per unit
MC
a
p
f
p"
D
D"
0
q"
q
0
Qg Qf Qa Quantity
Quantity
per period
per period
Again, suppose that the initial long-run equilibrium is shown by point a in the market and point e
for the firm. Now suppose that market demand for this product declines from D to D"  the
market price falls to p"  the demand curve facing each firm drops to d"
Each firm responds in the short run by cutting its output to q", where marginal cost equals the nowlower marginal revenue. Market output falls to Qf  each firm operates at a loss as shown by the red
shaded area.
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3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
35
END
6.3b: Long-Run Adjustment to a Decrease in Demand
Outline
(a) Firm
(b) Industry, or Market
S"
ATC
LRAC
e
p
d
Loss
p"
d"
Price per unit
Dollars per unit
MC
g
S
a
S*
p
f
p"
D
D"
0
q"
q
Quantity
per period
0
Qg
Qf
Qa
Quantity
per period
The short-run loss, if it continues, will in the long run force some firms out of this business  market
supply will decrease from S to S"  price increases back to p and the new market equilibrium is
shown by point g. Market output has fallen to Qg and the remaining firms are just earning a normal
profit as firm demand shifts back to d.
Begin 2. Structure
3.Profit
4.Shut DownReturn
5.Supply
6.Shifts Shifts
7 Eff
to 6.0 Demand
Outline
36
END
6.4a Draw Demand Shifts
Outline
You can draw and drop the objects to practice demand shifts
For example: In
the right graph
draw the
diagram of
market price, in
the left draw the
firm
equilibrium, in
the right
increase
demand and in
the left show the
profit for the
firm using the
dots CLICK HERE
FOR ANSWER
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
37
END
Outline For
6.4 B ANSWER
example: In the right graph draw the diagraom of market price,
in the left draw the firm equilibrium, in the right increase demand
and in the leftshow the profit for the firm using the dots. CLICK
HERE TO RETURN TO TOOLBOX slide
38
7.0 Efficiency
Outline
7.1 Productive and Allocative Efficiency
7.2 Productive: least cost
7.3 Allocative: highest consumer valuation
7.4 Graphically
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
7.1 Perfect Competition and Efficiency
Outline
How does perfect competition stack up as
an efficient allocator of resources?
There are two concepts of efficiency used to
benchmark market performance
Outline
Productive efficiency refers to producing
output at the least possible cost
Allocative efficiency refers to buying the output
at the least possible price
Perfect competition guarantees both allocative
and productive efficiency in the long run
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3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
40
END
7.2 Productive Efficiency
Outline
Aka Producer Surplus
Productive efficiency occurs when the firm
produces at the minimum point on its long-run
average-cost curve  the market price equals the
minimum average total cost
The entry and exit of firms ensure that each firm
produces at the minimum point on its short-run
and long-run average cost curve
Outline
Thus, perfect competition produces output at the
least possible cost per unit in the long run
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3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
41
END
7.3 Allocative Efficiency
Outline
Aka Consumer Surplus
Allocative efficiency occurs when the marginal
benefit that consumers attach to the final
unit purchased, just equals the opportunity
cost of the resources employed to produce
that unit.
The demand curve reflects the marginal benefit
that consumers attach to each unit
Outline
In perfect competition, at the equilibrium
price consumers marginal benefit equals the
marginal cost of supplying the last unit sold
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3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
42
END
7.4 Graphically
Outline
In the short run, producer surplus is
the total revenue producers are paid
minus their variable cost of production
Dollars per unit
In our example, the market-clearing
price is $10 per unit, and producer
surplus is the red shaded area under
the price but just above the supply
curve.
The combination of consumer
surplus and producer surplus
shows the gains from voluntary
exchange.
Productive and allocative efficiency
in the short run occurs at point e,
which also is the combination of
price and quantity that maximizes
the sum of consumer and producer
surplus.
Consumer
surplus
S
e
10
6
5
Producer
surplus
D
m
Quantity per period
0
Begin 2. Structure
100,000 120,000
3.Profit 4.Shut Down
5.Supply
200,000
6.Shifts 7 Eff
43
END
END OF PRESENTATION
Outline
Pics linked to topics in lecture
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
44
END
Outline
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
Begin 2. Structure
3.Profit 4.Shut Down
5.Supply
6.Shifts 7 Eff
END
45
END