Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
FIRMS IN COMPETITIVE MARKETS Characteristics of Perfect Competition 1. 2. 3. 4. 5. 6. 7. There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market. The individual firm produces a small portion of total market output. The firm cannot have any influence over the price it charges. The individual firm in a perfectly competitive market is a price taker. It takes the price determined by the market as the price that it will receive for its output. Revenue of a Competitive Firm • Total revenue for a firm is the selling price times the quantity sold. TR = (P X Q) Revenue of a Competitive Firm • Total revenue is proportional to the amount of output. Revenue of a Competitive Firm • Average revenue tells us how much revenue a firm receives for the typical unit sold. Revenue of a Competitive Firm • In perfect competition, average revenue equals the price of the good. Revenue of a Competitive Firm • In perfect competition, average revenue equals the price of the good. Total revenue Average revenue = Quantity (Price Quantity) = Quantity = Price Revenue of a Competitive Firm • Marginal revenue is the change in total revenue from an additional unit sold. MR =DTR/DQ Revenue of a Competitive Firm • For competitive firms, marginal revenue equals the price of the good. Profit Maximization for the Competitive Firm • The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost. Profit Maximization for the Competitive Firm • Profit maximization occurs at the quantity where marginal revenue equals marginal cost. If MR > MC, increase Q to increase profit. If MR < MC, decrease Q to increase profit. If MR = MC, profit is maximized. Profit Maximization for the Competitive Firm Costs and Revenue 0 Quantity Profit Maximization for the Competitive Firm Costs and Revenue ATC AVC 0 Quantity Profit Maximization for the Competitive Firm Costs and Revenue MC ATC AVC 0 Quantity Profit Maximization for the Competitive Firm Costs and Revenue MC ATC P 0 P = AR = MR AVC Quantity Profit Maximization for the Competitive Firm Costs and Revenue The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. MC ATC P 0 P = AR = MR AVC QMAX Quantity Profit Maximization for the Competitive Firm • A competitive firm will adjust its production level until quantity reaches QMAX where profit is maximized. Profit Maximization for the Competitive Firm Costs and Revenue MC ATC P 0 P = AR = MR AVC QMAX Quantity Profit Maximization for the Competitive Firm Costs and Revenue MC ATC P = MR1 P = AR = MR AVC MC1 0 Q1 QMAX Quantity Profit Maximization for the Competitive Firm Costs and Revenue MC ATC P = MR1 P = AR = MR AVC MC1 MR > MC, increase Q 0 Q1 QMAX Quantity Profit Maximization for the Competitive Firm Costs and Revenue MC MC2 ATC P = MR2 0 P = AR = MR AVC QMAX Q2 Quantity Profit Maximization for the Competitive Firm Costs and Revenue MC MC2 ATC P = MR2 P = AR = MR AVC MR < MC, decrease Q 0 QMAX Q2 Quantity The Firm’s Decision to Shut Down • A shutdown refers to a short-run decision not to produce anything during a specific period of time. • Exit refers to a long-run decision to leave the market. The Firm’s Decision to Shut Down • The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down. Sunk costs are costs that have already been committed and cannot be recovered. The Firm’s Decision to Shut Down • The firm shuts down if the revenue it gets from producing is less than the variable cost of production. Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC The Firm’s Decision to Shut Down Costs 0 Quantity The Firm’s Decision to Shut Down Costs MC ATC AVC 0 Quantity The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC AVC 0 Quantity The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC If P > AVC, keep producing in the short run. 0 AVC Quantity The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC If P > AVC, keep producing in the short run. AVC If P < AVC, shut down. 0 Quantity The Firm’s Decision to Shut Down • The portion of the marginal-cost curve that lies above average variable cost is the competitive firm’s short-run supply curve. The Firm’s Decision to Shut Down Costs If P > ATC, keep producing at a profit. MC ATC If P > AVC, keep producing in the short run. AVC If P < AVC, shut down. 0 Quantity The Firm’s Decision to Shut Down Costs Firm’s short-run supply curve MC ATC AVC 0 Quantity The Long-Run Decision to Exit an Industry • In the long-run, the firm exits if the revenue it would get from producing is less than its total cost. Exit if TR < TC Exit if TR/Q < TC/Q Exit if P < ATC The Long-Run Decision to Enter an Industry • A firm will enter the industry if such an action would be profitable. Enter if TR > TC Enter if TR/Q > TC/Q Enter if P > ATC The Competitive Firm’s LongRun Supply Curve The Competitive Firm’s LongRun Supply Curve Costs 0 Quantity The Competitive Firm’s LongRun Supply Curve Costs MC ATC AVC 0 Quantity The Competitive Firm’s LongRun Supply Curve Costs Firm enters if P > ATC MC ATC AVC 0 Quantity The Competitive Firm’s LongRun Supply Curve Costs MC Firm enters if P > ATC ATC AVC Firm exits if P < ATC 0 Quantity The Competitive Firm’s LongRun Supply Curve • The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost. The Competitive Firm’s LongRun Supply Curve Costs MC Firm enters if P > ATC ATC AVC Firm exits if P < ATC 0 Quantity The Competitive Firm’s LongRun Supply Curve Costs Firm’s long-run supply curve MC ATC AVC 0 Quantity The Firm’s Short-Run and Long-Run Supply Curves • Short-Run Supply Curve The portion of its marginal cost curve that lies above average variable cost. • Long-Run Supply Curve The marginal cost curve above the minimum point of its average total cost curve. Profit as the Area Between Price and Average Total Cost Profit as the Area Between Price and Average Total Cost Price 0 Quantity Profit as the Area Between Price and Average Total Cost Price MC 0 ATC Quantity Profit as the Area Between Price and Average Total Cost Price MC ATC P P = AR = MR 0 Quantity Profit as the Area Between Price and Average Total Cost Price MC P ATC P = AR = MR ATC Profit-maximizing quantity 0 Q Quantity Profit as the Area Between Price and Average Total Cost Price MC ATC Profit P P = AR = MR ATC Profit-maximizing quantity 0 Q Quantity Loss as the Area Between Price and Average Total Cost Loss as the Area Between Price and Average Total Cost Price MC 0 ATC Quantity Loss as the Area Between Price and Average Total Cost Price MC ATC P P = AR = MR 0 Quantity Loss as the Area Between Price and Average Total Cost Price MC ATC ATC P P = AR = MR Loss-minimizing quantity 0 Q Quantity Loss as the Area Between Price and Average Total Cost Price MC ATC ATC P P = AR = MR Loss Loss-minimizing quantity 0 Q Quantity Quick Quiz! • How does the price faced by a profitmaximizing competitive firm compare to its marginal cost? Quick Quiz! • When will a profit-maximizing firm decide to shut down? Supply in a Competitive Market • Market supply equals the sum of the quantities supplied by the individual firms in the market. Supply in a Competitive Market • Market Supply with a Fixed Number of Firms For any given price, each firm supplies a quantity of output so that price equals its marginal cost. The market supply curve reflects the individual firms’ marginal cost curves. Supply in a Competitive Market • Market Supply with Entry and Exit Firms will enter or exit the market until profit is driven to zero. In the long-run, price equals the minimum of average total cost. The long-run market supply curve is horizontal at this price. The Supply Curve in a Competitive Market (a) Firm’s Zero-Profit Condition Price (b) Market Supply Price MC P= minimum ATC 0 ATC Supply Quantity (firm) 0 Quantity (market) Increase in Demand in the Short Run • An increase in demand raises price and quantity in the short run. • Firms earn profits because price now exceeds average total cost. Initial Condition Market Firm Price 0 Price Quantity (firm) 0 Quantity (market) Initial Condition Market Firm Price Price MC ATC S1 A P1 Long-run supply P1 D1 0 Quantity (firm) 0 Q1 Quantity (market) Short-Run Response Market Firm Price Price MC ATC B S1 A P1 P1 D1 0 Quantity (firm) 0 Q1 Long-run supply D2 Quantity (market) Short-Run Response Market Firm Price Price MC ATC B P2 P2 P1 P1 S1 A D1 0 Quantity (firm) 0 Q1 Q2 Long-run supply D2 Quantity (market) Short-Run Response Market Firm Price Price Profit MC ATC B P2 P2 P1 P1 S1 A D1 0 Quantity (firm) 0 Q1 Q2 Long-run supply D2 Quantity (market) Increase in Demand in the Long Run • Over time, the short-run supply curve shifts as profits encourage new firms to enter the market. Increase in Demand in the Long Run • Price falls as new firms enter the market. Increase in Demand in the Long Run • In the new long-run equilibrium profits return to zero and price returns to minimum average total cost. Increase in Demand in the Long Run • The market has more firms to satisfy the greater demand. Long-Run Response Market Firm Price Price Profit MC ATC B P2 P2 P1 P1 S1 A D1 0 Quantity (firm) 0 Q1 Q2 Long-run supply D2 Quantity (market) Long-Run Response Market Firm Price Price Profit MC ATC B P2 P2 P1 P1 S1 S2 A Long-run supply D2 D1 0 Quantity (firm) 0 Q1 Q2 Quantity (market) Long-Run Response Market Firm Price Price MC ATC B P2 P1 S1 S2 A Long-run supply P1 D2 D1 0 Quantity (firm) 0 Q1 Q2 Quantity (market) Increase in Demand in the Short and Long Run Market Firm Price Price MC ATC B A P1 S1 C P1 S2 Long-run supply D2 D1 0 Quantity (firm) 0 Q1 Q2 Q3 Quantity (market) Why the Long-Run Supply Curve Might Slope Upward • Some resources used in production may be available only in limited quantities. • Firms may have different costs. Conclusion • Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. • The price of the good equals both the firm’s average revenue and its marginal revenue Conclusion • To maximize profit a firm chooses the quantity of output where marginal revenue equals marginal cost. • This is also the quantity at which price equals marginal cost. Conclusion • In the short run, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. • In the long run, it will choose to exit if the price is less than average total cost. Conclusion • If firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production in the long run. • The number of firms adjusts to drive the market back to the zero-profit equilibrium. Conclusion • Because firms can enter and exit more easily in the long run than the short run, the long-run supply curve is typically more elastic than the short-run supply curve. FIRMS IN COMPETITIVE MARKETS End of Chapter 14 Costs and Revenue The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. MC MC2 ATC P = MR1 = MR2 P = AR = MR AVC MC1 0 Figure 14-1 Q1 QMAX Q2 Quantity Price MC P2 ATC P1 AVC 0 Figure 14-2 Q1 Q2 Quantity Costs Firm’s short-run supply curve MC ATC AVC Firm shuts down if P < AVC 0 Figure 14-3 Quantity Costs Firm’s long-run supply curve MC ATC AVC Firm exits if P < ATC 0 Figure 14-4 Quantity (a) A Firm with Profits Price MC ATC Profit P Figure 14-5a ATC P = AR = MR 0 Q Quantity (profit-maximizing quantity) (b) A Firm with Losses Price MC ATC ATC P P = AR = MR Loss 0 Figure 14-5b Q (loss-minimizing quantity) Quantity (a) Individual Firm Supply Price (b) Market Supply Price MC Supply $2.00 $2.00 1.00 1.00 0 Figure 14-6 100 200 Quantity (firm) 0 100,000 200,000 Quantity (market) (a) Firm s Zero-Profit Condition Price (b) Market Supply Price MC ATC P = minimum ATC 0 Figure 14-7 Supply Quantity (firm) 0 Quantity (market) (a) Initial Condition Market Firm Price Price MC P1 ATC Short-run supply P P1 A Long-run supply Demand 0 Quantity (firm) 0 Q1 Quantity (market) (b) Short-Run Response Market Firm Price Price Profit B MC ATC P2 P2 P 1 P1 S1 A D1 0 Quantity (firm) 0 Q1 Q2 Long-run supply D2 Quantity (market) (c) Long-Run Response Firm Market Price Price MC ATC P1 P2 P1 B A S1 C S2 Long-run supply D2 D1 0 Figure 14-8 Quantity (firm) 0 Q 1 Q 2 Q 3 Quantity (market) (a) Initial Condition Market Firm Price Price MC ATC P1 0 Figure 14-8a P Quantity (firm) P1 0 A Q1 Short-run supply, S1 Long-run supply Demand, D1 Quantity (market) (b) Short-Run Response Market Firm Price Price Profit MC ATC B P2 P2 P1 P1 S1 A D1 0 Figure 14-8b Quantity (firm) 0 Q1 Q2 Long-run supply D2 Quantity (market) (c) Long-Run Response Firm Market Price Price MC ATC P1 P2 P1 B A S1 C S2 Long-run supply D2 D1 0 Figure 14-8c Quantity (firm) 0 Q1 Q2 Q3 Quantity (market)