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
Surplus value wikipedia , lookup
History of economic thought wikipedia , lookup
Schools of economic thought wikipedia , lookup
Supply and demand wikipedia , lookup
Production for use wikipedia , lookup
Icarus paradox wikipedia , lookup
Behavioral economics wikipedia , lookup
Economics of digitization wikipedia , lookup
Economic equilibrium wikipedia , lookup
Brander–Spencer model wikipedia , lookup
PPA 723: Managerial Economics Lecture 12: Competition in the Short Run Managerial Economics, Lecture 12: Competition in Short Run Outline What Is Perfect Competition? Competitive Markets in the Short Run Managerial Economics, Lecture 12: Competition in Short Run Competition Perfect competition exists in a market if: Consumers believe that all firms sell identical products. Firms can freely enter and exit the market. Buyers and sellers know the prices charged by firms. Transaction costs are low. Managerial Economics, Lecture 12: Competition in Short Run Price Taking If all 4 conditions hold, each firm is a price taker, i.e. a firm cannot affect the market price. Even if some of conditions don't hold, firms may be price takers If entry of new firms is limited but there are many firms, for example, no firm can successfully raise its price. Managerial Economics, Lecture 12: Competition in Short Run Why Start with Competition? Competition is a frequently observed market structure. As we will see, competition has some desirable properties, so it is useful to compare other market structure to competition. Managerial Economics, Lecture 12: Competition in Short Run Profit Maximization Economists assume that a firm maximizes its profit. A competitive firm that did not profit maximize would lose money and be driven out of business. Other objectives, such as sales maximization, are sometimes considered—but not here. Managerial Economics, Lecture 12: Competition in Short Run Definition of Profit Profit, , equals a firm's revenues, R, minus its costs, C: =R–C If profit is negative, < 0, the firm is said to have a loss. Managerial Economics, Lecture 12: Competition in Short Run Business vs. Economic profit Business profit is revenue minus business cost (only explicit cost). Economic profit is revenue minus economic cost (explicit + implicit cost, i.e., opportunity cost). Because explicit cost economic cost, business profit economic profit. We will always use economic profit. Managerial Economics, Lecture 12: Competition in Short Run Example: Your Own Firm You pay explicit costs (wages, materials,...). You do not pay yourself a salary. You receive a business profit of $70,000 per year. Your opportunity cost (foregone salary) is $75,000. So you have an economic loss of $5,000. Managerial Economics, Lecture 12: Competition in Short Run Profit Function Profit varies with output: (q) = R(q) - C(q) So a firm must select the output that maximizes its profit. Managerial Economics, Lecture 12: Competition in Short Run Two Steps to Maximize Profit To maximize its profit, any firm (not just a competitive firm) must answer two questions: The output decision: If the firm produces, what output level, q*, maximizes its profit or minimizes its loss? The shut-down decision: Is it more profitable to produce q* or to shut down and produce no output? Managerial Economics, Lecture 12: Competition in Short Run Figure 8.2 Maximizing Profit , Profit * Profit D < 0 D > 0 1 0 1 q* Quantity, q, Units per day Managerial Economics, Lecture 12: Competition in Short Run Maximizing Profit, 1 The quantity at which is maximized is the quantity at which marginal profit (extra profit from selling one more unit of output, D/Dq) equals zero, which is the quantity at which the slope of the profit curve is zero. Managerial Economics, Lecture 12: Competition in Short Run Maximizing Profit, 2 The profit function tells us that marginal profit(q) = MR(q) - MC(q) So marginal profit equals zero when MR(q) = MC(q). For a competitive firm, MR(q) = P. Thus a competitive firm maximizes profit by picking the q at which MC(q) = P. Managerial Economics, Lecture 12: Competition in Short Run Maximizing Profit, 3 Now consider a firm asking whether to produce one more unit of output. If P > MC(q), the firm can increase its profit by producing another unit. If P < MC(q), the firm will decrease its profit by producing another unit. If P = MC, a firm cannot increase its profit by altering q. Managerial Economics, Competition in Short Run (a) Cost, revenue, Thousand $ Cost, C 4,800 1 2,272 Figure 8.3 How a Competitive Firm Maximizes Profit MR= 8 * 1,846 426 100 0 –100 Revenue (q) * = $426,000 140 284 q , Thousand metric tons of li me per year (b) p, $ per ton 10 MC AC e 8 p = MR * = $426,000 6.50 6 0 140 284 q , Thousand metric tons of lime per year Managerial Economics, Lecture 12: Competition in Short Run Equivalent Shut-Down Rules Rule 1: A firm shuts down only if it can reduce its loss by doing so. Rule 2: A firm shuts down only if its revenue is less than its avoidable cost. By shutting down, firm eliminates only avoidable costs: variable costs fixed costs that are not sunk Managerial Economics, Lecture 12: Competition in Short Run Shutting Down: Example 1 R = $2,000 VC = $1,000 F = $3,000 (sunk) = R - VC - F = $2,000 - $1,000 - $3,000 = $2,000 This firm does not shut down. Managerial Economics, Lecture 12: Competition in Short Run Shutting Down, Example 2 R = $500 VC = $1,000 F = $3,000 (sunk) = R - VC - F = $500 - $1,000 - $3,000 = -$3,500 This firm shuts down. Managerial Economics, Lecture 12: Competition in Short Run SR Shut-Down Decision Applying the shut-down rules to the cost-curve diagram indicates that: A firm shuts down if P < minimum AVC In this case, the firm cannot even cover its variable costs, let alone its fixed costs. A firm will still operate if P < minimum AC (but greater than minimum AVC). The firm has a loss in this case, but it covers some fixed costs, so its loss would be larger if it shut down. Managerial Economics, Lecture 12: Competition in Short Run Figure 8.4 The Short-Run Shutdown Decision p, $ per ton MC AC b 6.12 6.00 AVC A = $62,000 5.50 B = $36,000 5.14 5.00 a 0 50 p e 100 140 q, Thousand metric tons of lime per year Managerial Economics, Lecture 12: Competition in Short Run SR Competitive Firm Supply Curve The output rule (pick q at which P = MC) and the shut-down rule (shut down if P < minimum AVC) imply that The firm’s short-run supply curve is the MC curve above the minimum of AVC curve. We have now gone behind the supply curve! Managerial Economics, Lecture 12: Competition in Short Run Figure 8.5 How the Profit-Maximizing Quantity Varies with Price p, $ per ton S e4 8 p4 e3 7 AC p3 AVC e2 6 p2 e1 p1 5 MC 0 q 1 = 50 q 2 = 140 q 3 = 215 q 4 = 285 q, Thousand metric tons of lime per year Managerial Economics, Lecture 12: Competition in Short Run Factor Prices and the SR Firm Supply Curve An increase in factor prices causes the production costs of a firm to rise, shifting the firm's supply curve to the left. If all factor prices double, costs double. If only one factor price rises, costs rise less than in proportion. Managerial Economics, Lecture 12: Competition in Short Run Figure 8.6 Effects of an Increase in the Cost of Materials on the p, $ per ton Vegetable Oil Supply Curve S2 S1 AVC 2 AVC 1 e2 12 e1 p 8.66 7 MC 2 MC 1 0 100 145 178 q, Hundred metric tons of oil per year Managerial Economics, Lecture 12: Competition in Short Run SR Market Supply with Identical Firms The market supply curve is the horizontal sum of the supply curves of all individual firms. The maximum number of firms in a market, n, is fixed in the short run. The market supply curve at any price is n times the supply of an individual firm. The larger n (more identical firms), the flatter (more elastic) the short-run market supply curve at each price. Managerial Economics, Lecture 12: Competition in Short Run Figure 8.7 Short-Run Market Supply with Five Identical Lime Firms (a) Firm (b) Market p, $ per ton 7 p, $ per ton 7 S1 S1 S2 S3 S4 6.47 AVC 6.47 6 6 5 5 S5 MC 0 50 140 175 q, Thousand metric tons of lime per year 0 50 150 250 100 200 700 Q, Thousand metric tons of lime per year Managerial Economics, Lecture 12: Competition in Short Run SR Market Supply with Differing Firms If firms face different costs, then relatively low-cost firms enter first. The more type of firms there are, the more kinks there will be in supply curve. Managerial Economics, Lecture 12: Competition in Short Run Figure 8.8 Short-Run Market Supply with Two Different Lime p, $ per ton Firms S2 8 S1 S 7 6 5 0 25 50 100 140 165 215 315 450 q, Q, Thousand metric tons of lime per year Managerial Economics, Lecture 12: Competition in Short Run SR Competitive Equilibrium The intersection of the short-run market supply curve and the market demand curve determines the short-run competitive equilibrium. If firms have identical costs, the market equilibrium involves no production if price falls below minimum AVC. Managerial Economics, Lecture 12: Competition in Short Run Figure 8.9 Short-Run Competitive Equilibrium in the Lime Market (a) Firm (b) Market p, $ per ton p, $ per ton 8 8 S1 e1 7 6.97 A B S D1 7 E1 AC D2 6.20 6 AVC 6 C 5 0 5 e2 q 2 = 50 q 1 = 215 q, Thousand metric tons of lime per year 0 E2 Q 2 = 250 Q 1 = 1,075 Q, Thousand metric tons of lime per year Managerial Economics, Lecture 12: Competition in Short Run Figure 8.10 Short-Run Effect of a Specific Tax in the Lime Market (a) Firm (b) Market p, $ per unit p, $ per unit S 1 + t S1 S+ t AV C + t AVC t e2 p2 p1 t E2 p1 + t S t E e1 t 1 D MC + t MC q2q1 q, Units per year Q 2 = nq2 Q 1 = nq 1 q, Units per year