Download Chapter 10 - Pure Competition

Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
10
C HAPTE R
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Pure
Competition
Copyright McGraw-Hill/Irwin, 2005
FOUR MARKET MODELS
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Pure Competition
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005
FOUR MARKET MODELS
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Imperfect Competition
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
All Markets that are
Not Purely Competitive
Pure Competition and
Efficiency
Pure
Competition
Key Terms
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Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005
FOUR MARKET MODELS
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Pure Monopoly
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Pure
Competition
Key Terms
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Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005
FOUR MARKET MODELS
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Monopolistic Competition
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Pure
Competition
Key Terms
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Pure
Monopoly
Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005
FOUR MARKET MODELS
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Oligopoly
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Pure
Competition
Key Terms
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Monopolistic
Competition
Pure
Monopoly
Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
FOUR MARKET MODELS
Pure Competition:
• Very Large Numbers
• Standardized Product
• “Price Takers”
• Free Entry and Exit
Pure Competition and
Efficiency
Pure
Competition
Key Terms
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Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Perfectly Elastic Demand
Price Taker Role
Total Revenue
Average Revenue
Marginal Revenue
For example...
Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$131
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
0
$
0
Marginal
Revenue (MR)
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$131
131
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
0
1
$
0]
131
Marginal
Revenue (MR)
$131
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$131
131
131
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
0
1
2
$
0]
131 ]
262
Marginal
Revenue (MR)
$131
131
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$131
131
131
131
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
0
1
2
3
$
0]
131 ]
262 ]
393
Marginal
Revenue (MR)
$131
131
131
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$131
131
131
131
131
Pure Competition and
Efficiency
Key Terms
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Copyright McGraw-Hill/Irwin, 2005
0
1
2
3
4
$
0]
131 ]
262 ]
393 ]
524
Marginal
Revenue (MR)
$131
131
131
131
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$131
131
131
131
131
131
131
131
131
131
131
Copyright McGraw-Hill/Irwin, 2005
0
1
2
3
4
5
6
7
8
9
10
$
0]
131 ]
262 ]
393 ]
524 ]
655 ]
786 ]
917 ]
1048 ]
1179 ]
1310
Marginal
Revenue (MR)
$131
131
131
131
131
131
131
131
131
131
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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DEMAND AS SEEN BY A
PURELY COMPETITIVE SELLER
Product Price (P)
Quantity
Total
(Average Revenue) Demanded (Q) Revenue (TR)
$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
Graphically
Presented…
Copyright McGraw-Hill/Irwin, 2005
Marginal
Revenue (MR)
$131
131
131
131
131
131
131
131
131
131
DEMAND, MARGINAL REVENUE, AND TOTAL
REVENUE IN PURE COMPETITION
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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TR
1048
Price and revenue
Short-Run Profit
Maximization
1179
917
786
655
524
393
262
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D = MR
131
0
1
2
3
4
5
6
7
8
Quantity Demanded (sold)
Copyright McGraw-Hill/Irwin, 2005
9
10
SHORT RUN PROFIT MAXIMIZATION
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Two Approaches...
First:
Total-Revenue -Total Cost Approach
The Decision Process:
•Should the firm produce?
•What quantity should be produced?
•What profit or loss will be realized?
The Decision Rule:
Produce in the short-run if it can
realize
1- A profit (or)
2- A loss less than its fixed costs
Copyright McGraw-Hill/Irwin, 2005
SHORT RUN PROFIT MAXIMIZATION
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Two Approaches...
First:
Total-Revenue -Total Cost Approach
The Decision Process:
•Should the firm produce?
•What quantity should be produced?
•What profit or loss will be realized?
The Decision Rule:
Produce in the short-run if it can
realize
1- A profit (or)
2- A loss less than its fixed costs
Applied
Graphically…
Copyright McGraw-Hill/Irwin, 2005
TOTAL REVENUE-TOTAL COST APPROACH
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Total Total
Total Fixed Variable Total
Product Cost Cost Cost
0
1
2
3
4
5
6
7
8
9
10
$ 100 $ 0 $ 100
100
90
190
100
170
270
100
240
340
100
300
400
100
370
470
100
450
550
100
540
640
100
650
750
100
780
880
100
930 1030
Copyright McGraw-Hill/Irwin, 2005
Price: $131
Total
Revenue Profit
$
0
131
262
393
524
655
786
917
1048
1179
1310
- $100
- 59
-8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
TOTAL REVENUE-TOTAL COST APPROACH
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Total Total
Total Fixed Variable Total
Product Cost Cost Cost
0
1
2
3
4
5
6
7
8
9
10
$ 100 $ 0 $ 100
100
90
190
100
170
270
100
240
340
100
300
400
100
370
470
100
450
550
100
540
640
100
650
750
100
780
880
100
930 1030
Copyright McGraw-Hill/Irwin, 2005
Price: $131
Total
Revenue Profit
$
0
131
262
393
524
655
786
917
1048
1179
1310
- $100
- 59
-8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
TOTAL REVENUE-TOTAL COST APPROACH
Four Market Models
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Total revenue and total cost
Demand as seen by a
Purely Competitive
Seller
$1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
Break-Even Point
(Normal Profit)
Total
Revenue
Maximum
Economic
Profits
$299
Total
Cost
Break-Even Point
(Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Copyright McGraw-Hill/Irwin, 2005
SHORT RUN PROFIT MAXIMIZATION
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Two Approaches...
First:
Total-Revenue -Total Cost Approach
Second:
Marginal-Revenue -Marginal Cost
Approach
MR = MC Rule
Three Characteristics of MR=MC Rule:
• The rule applies only if producing
is preferred to shutting down
• Rule applies to all markets
• Rule can be restated P=MC
Copyright McGraw-Hill/Irwin, 2005
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Average Average Average
Price = Total
Total Fixed Variable Total Marginal Marginal Economic
Cost
Cost
Product Cost
Cost Revenue Profit/Loss
0
1
2
3
4
5
6
7
8
9
10
The
$100.00 $90.00 $190.00
same
profit
50.00 85.00
135.00
33.33 80.00 113.33
maximizing
25.00 75.00 100.00
20.00 74.00
94.00
result!
16.67 75.00
91.67
14.29
12.50
11.11
10.00
77.14
81.25
86.67
93.00
Copyright McGraw-Hill/Irwin, 2005
91.43
93.75
97.78
103.00
90
80
70
60
70
80
90
110
130
150
$ 131
131
131
131
131
131
131
131
131
131
- $100
- 59
-8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Average Average Average
Price = Total
Total Fixed Variable Total Marginal Marginal Economic
Cost
Cost
Product Cost
Cost Revenue Profit/Loss
0
1
2
3
4
5
6
7
8
9
10
$100.00 $90.00 $190.00 90
50.00 85.00 135.00 80
33.33 80.00 113.33 70
25.00 75.00 100.00 60
20.00 74.00
94.00 70
16.67 75.00
91.67 80
14.29 77.14
91.43 90
12.50 81.25
93.75 110
11.11 86.67
97.78 130
10.00 93.00 103.00 150
$ 131
131
131
131
131
131
131
131
131
131
Graphically
Copyright McGraw-Hill/Irwin, 2005
- $100
- 59
-8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Profit Maximization Position
Demand as seen by a
Purely Competitive
Seller
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue
Short-Run Profit
Maximization
$200
Economic Profit
MC
150
MR
ATC
AVC
$131.00
100
$97.78
50
Next
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0
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2005
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Profit Maximization Position
Demand as seen by a
Purely Competitive
Seller
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue
Short-Run Profit
Maximization
$200
Economic Profit
MC
150
$131.00
MR = MC
100
$97.78
Optimum
Solution
50
Next
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0
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2005
MR
ATC
AVC
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Loss Minimization Position
If the price is lowered
from $131 to $81…
the MR=MC rule still applies
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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…but the MR = MC point
changes.
Copyright McGraw-Hill/Irwin, 2005
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Loss Minimization Position
Demand as seen by a
Purely Competitive
Seller
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue
Short-Run Profit
Maximization
$200
Economic Loss
MC
150
ATC
AVC
MR
100
$91.67
$81.00
50
Next
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0
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2005
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Short-Run Shut Down Point
Demand as seen by a
Purely Competitive
Seller
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue
Short-Run Profit
Maximization
$200
MC
150
ATC
AVC
100
MR
Minimum AVC
is the Shut-Down
Point
$71.00
50
Next
Slide
0
1 2 3 4 5 6 7 8 9 10
Copyright McGraw-Hill/Irwin, 2005
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Marginal Cost & Short-Run Supply
Observe the impact upon
profitability as price is changed
Price
Quantity
Supplied
Maximum Profit (+)
Or Minimum Loss (-)
$151
131
111
91
81
71
61
10
9
8
7
6
0
0
$+480
+299
+138
-3
-64
-100
-100
Copyright McGraw-Hill/Irwin, 2005
MARGINAL REVENUE-MARGINAL COST APPROACH
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue, (dollars)
Four Market Models
Marginal Cost & Short-Run Supply
Break-even
(Normal Profit)
Point
MC
MR5
P5
ATC
MR4
P4
AVC
P3
P2
P1
MR3
MR2
MR1
Do not
Produce –
Below AVC
Q2 Q3 Q4
Copyright McGraw-Hill/Irwin, 2005
Q5
Quantity Supplied
MARGINAL REVENUE-MARGINAL COST APPROACH
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue, (dollars)
Four Market Models
Marginal Cost & Short-Run Supply
Yields the
Short-Run
Supply Curve
P5
Supply
MC
MR5
P4
MR4
P3
MR3
MR2
MR1
P2
P1
No
Production
Below AVC
Q2 Q3 Q4
Copyright McGraw-Hill/Irwin, 2005
Q5
Quantity Supplied
MARGINAL REVENUE-MARGINAL COST APPROACH
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue, (dollars)
Four Market Models
Marginal Cost & Short-Run Supply
Copyright McGraw-Hill/Irwin, 2005
MC2
S2
MC1
S1
AVC2
AVC1
Higher Costs Move the
Supply Curve to the Left
Quantity Supplied
MARGINAL REVENUE-MARGINAL COST APPROACH
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Cost and Revenue, (dollars)
Four Market Models
Marginal Cost & Short-Run Supply
Lower Costs Move
the Supply Curve
to the Right
Copyright McGraw-Hill/Irwin, 2005
MC1
S1
MC2
S2
AVC1
AVC2
Quantity Supplied
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” its
Price from the Industry Equilibrium
Four Market Models
Demand as seen by a
Purely Competitive
Seller
P
Short-Run Profit
Maximization
P
Economic
ATC Profit S=MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
S= MC’s
D
$111
Long-Run Equilibrium
for a Competitive Firm
$111
AVC
Pure Competition and
Efficiency
D
Key Terms
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8
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
8000
Industry
Q
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” its
Price from the Industry Equilibrium
Four Market Models
Demand as seen by a
Purely Competitive
Seller
P
Short-Run Profit
Maximization
Short-Run Competitive
Equilibrium
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
P
Economic
ATC Profit S=MC
Marginal Revenue –
Marginal Cost
Approach
Long-Run Supply
S= MC’s
$111
How about
the
D
long-run?
AVC
$111
D
Key Terms
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8
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
8000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Assumptions...
• Entry and Exit Only
• Identical Costs
• Constant-Cost Industry
Goal of the Analysis
Price = Minimum ATC
Long-Run Equilibrium - The
Zero Economic Profit Model
Copyright McGraw-Hill/Irwin, 2005
PROFIT MAXIMIZATION IN THE LONG-RUN
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Temporary profits and the reestablishment
of long-run equilibrium
P
P
Short-Run Profit
Maximization
MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
S1
ATC
$60
50
40
MR
$60
50
40
Pure Competition and
Efficiency
D1
Key Terms
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100
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
An increase in demand increases profits.
Four Market Models
Demand as seen by a
Purely Competitive
Seller
P
Short-Run Profit
Maximization
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
S1
P
MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Economic
Profits
ATC
$60
50
40
MR
$60
50
40
D2
Pure Competition and
Efficiency
D1
Key Terms
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100
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
New competitors increase supply and lower
prices decrease economic profits.
P Zero Economic
Profits
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
P
S2
MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
S1
ATC
$60
50
40
MR
$60
50
40
D2
Pure Competition and
Efficiency
D1
Key Terms
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100
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Decreases in demand, Losses, and the
Reestablishment of Long-Run Equilibrium
P
P
Short-Run Profit
Maximization
MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
S1
ATC
$60
50
40
MR $60
50
40
Pure Competition and
Efficiency
D1
Key Terms
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100
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
A decrease in demand creates losses.
Four Market Models
Demand as seen by a
Purely Competitive
Seller
P
Short-Run Profit
Maximization
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
S1
P
MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Economic
Losses
ATC
$60
50
40
MR $60
50
40
Pure Competition and
Efficiency
D1
D2
Key Terms
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100
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Competitors with losses decrease supply and
prices return to zero economic profits.S3
Return to Zero
P Economic Profits
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
P
MC
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
S1
ATC
$60
50
40
MR $60
50
40
Pure Competition and
Efficiency
D1
D2
Key Terms
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100
Firm
(price taker)
Copyright McGraw-Hill/Irwin, 2005
Q
100,000
Industry
Q
Four Market Models
LONG-RUN SUPPLY IN A
CONSTANT COST INDUSTRY
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Constant Cost Industry
Perfectly Elastic
Long-Run Supply
Key Terms
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Graphically...
Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a
Purely Competitive
Seller
LONG-RUN SUPPLY IN A
CONSTANT COST INDUSTRY
P
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
P1
P2 =$50
P3
Z3
Z1
Z2
S
Pure Competition and
Efficiency
Key Terms
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D3 D1 D2
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Q3
Q1
Q2
90,000 100,000 110,000
Copyright McGraw-Hill/Irwin, 2005
Q
Four Market Models
LONG-RUN SUPPLY IN A
CONSTANT COST INDUSTRY
Demand as seen by a
Purely Competitive
Seller
P
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
P1
P2
P3
How does an increasing
Z
Z
Z
cost
industry
differ?
S
=$50
3
1
2
Pure Competition and
Efficiency
Key Terms
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D3 D1 D2
Next
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Q3
Q1
Q2
90,000 100,000 110,000
Copyright McGraw-Hill/Irwin, 2005
Q
Four Market Models
Demand as seen by a
Purely Competitive
Seller
LONG-RUN SUPPLY IN AN
INCREASING COST INDUSTRY
P
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
S
P1 $55
P2 50
P3 45
Long-Run Equilibrium
for a Competitive Firm
Y1
Y2
Y3
Pure Competition and
Efficiency
Key Terms
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D3
Next
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Q3
Q1
Q2
90,000 100,000 110,000
Copyright McGraw-Hill/Irwin, 2005
D1
D2
Q
Four Market Models
Demand as seen by a
Purely Competitive
Seller
LONG-RUN SUPPLY IN AN
INCREASING COST INDUSTRY
P
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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S
How does a
decreasing cost
industry differ?
P1 $55
P2 50
P3 45
Y1
Y2
Y3
D3
Next
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Q3
Q1
Q2
90,000 100,000 110,000
Copyright McGraw-Hill/Irwin, 2005
D1
D2
Q
Four Market Models
LONG-RUN SUPPLY IN AN
INCREASING COST INDUSTRY
Demand as seen by a
Purely Competitive
Seller
P
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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S
What
is the long$55
50
45
run
competitive
equilibrium?
P1
P2
P3
Y1
Y2
Y3
D3
Next
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Q3
Q1
Q2
90,000 100,000 110,000
Copyright McGraw-Hill/Irwin, 2005
D1
D2
Q
Four Market Models
LONG-RUN EQUILIBRIUM
FOR A COMPETITIVE FIRM
Demand as seen by a
Purely Competitive
Seller
MC
Short-Run Profit
Maximization
ATC
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Price
Marginal Revenue –
Marginal Cost
Approach
P
MR
Pure Competition and
Efficiency
Key Terms
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Price = MC = Minimum ATC
(normal profit)
Q
Quantity
Copyright McGraw-Hill/Irwin, 2005
PURE COMPETITION AND EFFICIENCY
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC
Copyright McGraw-Hill/Irwin, 2005
PURE COMPETITION AND EFFICIENCY
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC
Copyright McGraw-Hill/Irwin, 2005
PURE COMPETITION AND EFFICIENCY
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC
Copyright McGraw-Hill/Irwin, 2005
PURE COMPETITION AND EFFICIENCY
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Productive Efficiency
Price = Minimum ATC
Allocative Efficiency
Price = MC
Underallocation
Price > MC
Overallocation
Price < MC
Copyright McGraw-Hill/Irwin, 2005
pure competition
pure monopoly
monopolistic
competition
oligopoly
imperfect competition
price taker
average revenue
total revenue
marginal revenue
Copyright McGraw-Hill/Irwin, 2005
break-even point
MR = MC rule
short-run supply curve
long-run supply curve
constant-cost industry
increasing-cost industry
decreasing-cost industry
productive efficiency
allocative efficiency
BACK
END
Four Market Models
Demand as seen by a
Purely Competitive
Seller
Short-Run Profit
Maximization
Marginal Revenue –
Marginal Cost
Approach
Coming Next...
Pure Monopoly
Short-Run Competitive
Equilibrium
Long-Run Supply
Long-Run Equilibrium
for a Competitive Firm
Pure Competition and
Efficiency
Key Terms
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Chapter 11
Copyright McGraw-Hill/Irwin, 2005