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ECON 160 Week 10 The Firm in Competition (Chapter 13) Review • Production is organized within Firms to take advantage of the benefits of Teamwork & Specialization. • Owners receive Profits to monitor their behavior to Maximize TR and Minimize TC. • Profits (Π) is increased if MR > MC. • What rate of output, Maximizes Π ? Alternative Rates of Production Wks 1 2 3 4 5 6 7 8 9 10 Qty. 10 25 45 62 76 86 91 95 97 98 M.P 10 15 20 17 14 10 5 4 2 1 Marginal Product • At first: Teamwork and specialization Increasing marginal product as you add workers. • Law of Diminishing Returns: As you add more of one input to a fixed amount of other inputs, Marginal product declines. Marginal Product Marg. Product 20 18 16 14 12 10 8 6 4 2 0 3-D Column 1 1 2 3 4 5 6 7 8 9 10 Workers Marginal Cost of Production Wks 1 2 3 4 5 6 7 8 9 10 Qty. 10 25 45 62 76 86 91 95 97 98 M.P 10 15 20 17 14 10 5 4 2 1 TC 120 140 160 180 200 220 240 260 280 300 M.C. $2.00 $1.33 $1.00 $1.18 $1.43 $2.00 $4.00 $5.00 10.00 20.00 Marginal Cost Marg. Cost $ Marginal Cost 5 4 3 2 1 Qtys/Day 0 10 25 45 62 76 86 91 95 97 98 Marginal Cost $ COST Marginal Cost Quantity of Output / Time period Average Cost of Production Wks 1 2 3 4 5 6 7 8 9 10 Qty. 10 25 45 62 76 86 91 95 97 98 M.P 10 15 20 17 14 10 5 4 2 1 TC 120 140 160 180 200 220 240 260 280 300 M.C . $2.00 $1.33 $1.00 $1.18 $1.43 $2.00 $4.00 $5.00 10.00 20.00 A.C. 12.00 5.60 3.55 2.90 2.64 2.56 2.73 2.74 2.89 3.06 Average Cost Average Cost $ Cost 12 10 8 6 4 2 0 10 25 45 62 76 86 91 95 97 98 Qtys/Day Average Total Cost $ COST Average Total Cost Quantity of Output Average Total Cost & Marginal Cost $ COST Marginal Cost Average Total Cost Quantity of Output / Time Economies of Scale $ COST Average Total Cost Minimum ATC Dis-Economies of Scale Economies of Scale Quantity of Output Demand Facing the Firm $P $P D1 $P D2 Q Q $P D3 Q Increasing degrees of Competition Increasing degrees of Market Power D4 Q Alternative Market Structures The Most Competitive Case: The Price Taker Firm Market and Firm Demand $P $P Market D Firm S Pe Pe D S D Qe Q/T Q/T Price Taker Firm $P MC Pe Price = Marginal Revenue D = MR Profit Maximizing Rate of output Qe Q/T Assumptions for a Price Taker • • • • Large number of buyers & sellers Homogeneous products Low information costs to buyers & sellers Low costs of entry and exit of firms Total Revenue = Pe x Qe $P MC Pe D Total Revenue Qe Q/T Total Cost = AC x Q $P MC AC Pe D AC at Qe Total Cost Qe Q/T Profit = TR - TC $P MC AC Pe D Q Q/T Market Response to Profits $P D So S’ Pe P’ D So Qe Q’ Qx/T Price Taker Firm: Zero Profits $P MC ATC D Pe’ D’ = MR Qe Q/T Price Taker Firm: Loss $P Pe MC Loss ATC D = MR Qe Q/T Market Response to Losses $P D S’ So P’ Po S’ D Q’ Qo Qx/T Price Taker Firm: Zero Profits $P MC ATC Pe’ D’ = MR Po D Qe Q/T Profits occur if (P=MC) > AC $P MC AC Pe D = MR Qe Q/T Price Taker Firm: Loss but stay in business Short-Run $P MC Loss AC Pc ATC AVC Demand TFC Shut down Loss Total Revenue TVC Qc Q/T Short Run Firm Supply: MC > AVC MC $P Profit Range Min. Loss Range SR Firm Supply AC AVC Q/T Long-Run Industry Equilibrium $P $P Market D Firm MC S ATC Pe Pe D S D Qe Q/T Qe Q/T Implications of Price-Taker Industry • Demand for the firm is horizontal at the market price • Efficiency: Price equals marginal cost of production • Competition drives price to equal Average cost • Economic profits only exist in the short-run.