2d2a8perfect competition

8/3/2019 2d2a8Perfect Competition

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Firms in Perfectly CompetitiveMarkets


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Firms in Perfectly Competitive Markets

MARKET STRUCTURE

CHARACTERISTI

C

PERFECT

COMPETITIO

N

MONOPOLISTI

C

COMPETITION

OLIGOPOLY MONOPOLY

Number of firms

Type of product

Ease of entry

Examples of

industries

Many

Identical

High

Wheat

Apples

Many

Differentiated

High

Selling DVDs

Restaurants

Few

Identical or

differentiated

Low

Manufacturing

computers

Manufacturing

automobiles

One

Unique

Entry

blocked

First-class

mail delivery

Tap water


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The Competitive Market for Microsoft Stock The software market has long been dominated by the Microsoft

Corporation. Chairman Bill Gates is one of the few corporate executives

who is well-known on Main Street as well as Wall Street. But unlike its

software, shares of Microsofts common stock are sold in a competitive

market. Over 60 million shares of Microsoft stock, out of over 10 billionshares outstanding, were sold every business day in 2005.

Since each share is exactly the same as any other, the thousands of buyers

and sellers of the stock were price takers. On a given day, they all must

accept the stock price established by the market given. In June 2005, this

price was about $25 per share. Sources: http://microsoft.com/msft/ and The Wall Street Journal,

June 24, 2005.
http://microsoft.com/msft/http://microsoft.com/msft/http://microsoft.com/msft/http://microsoft.com/msft/http://microsoft.com/msft/http://microsoft.com/msft/


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Perfectly Competitive Markets

Perfectly competitive market Amarket that meets the conditions of (1)

many buyers and sellers, (2) all firmsselling identical products, (3) no barriers

to new firms entering the market.


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Perfectly Competitive Markets A Perfectly Competitive Firm Cannot Affect the Market Price

Price takerA buyer or seller that is unable to affect the market price.

A Perfectly Competitive FirmFaces a Horizontal DemandCurve


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How a Firm Maximizes Profit in a Perfectly

Competitive Market

Profit Total revenue minus total cost. Profit = TR - TC

LEARNING OBJECTIVE2

Dont Confuse the Demand Curve for Farmer Douglass Wheat with the Market Demand Curve for Wheat


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How a Firm Maximizes Profit in Perfectly Competitive Market

Revenue for a Firm in a Perfectly Competitive Market Average revenue (AR) Total revenue

divided by the number of units sold.

Q

TR

AR

or,quantityinChange

revenuein totalChangeRevenueMarginal

Q

TRMR

PQ

QP

Q

TR

AR

so,

Marginal revenue (MR) Change in totalrevenue from selling one more unit.


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How a Firm Maximizes Profit in a Perfectly Competitive Market

Revenue for a Firm in a Perfectly Competitive Market

NUMBER OFBUSHELS

(Q)

MARKET PRICE

(PER BUSHEL)

(P)

TOTALREVENUE

(TR)

AVERAGEREVENUE

(AR)

MARGINALREVENUE

(MR)

0

1

2

3

4

5

6

7

8

910

$4

4

4

4

4

4

4

4

4

44

$0

4

8

12

16

20

24

28

32

3640

-

$4

4

4

4

4

4

4

4

44

-

$4

4

4

4

4

4

4

4

44


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Revenue for a Firm in a Perfectly Competitive Market

QUANTITY

(BUSHELS)

(Q)

TOTAL

REVENUE

(TR)

TOTAL

COSTS

(TC)

PROFIT

(TR-TC)

MARGINAL

REVENUE

(MR)

MARGINAL

COST

(MC)

01

2

3

4

56

7

8

9

10

$0.004.00

8.00

12.00

16.00

20.0024.00

28.00

32.00

36.00

40.00

$1.004.00

6.00

7.50

9.50

12.0015.00

19.50

25.50

32.50

40.50

-$1.000.00

2.00

4.50

6.50

8.009.00

8.50

6.50

3.50

-0.50

$4.00

4.00

4.00

4.00

4.004.00

4.00

4.00

4.00

4.00

$3.00

2.00

1.50

2.00

2.503.00

4.50

6.00

7.00

8.00


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The Profit-Maximizing Levelof Output


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Profit = (P xQ)TC

Illustrating Profit or Loss on the Cost Curve Graph

LEARNING OBJECTIVE3

Q

QP )(

Q

Profit

Q

TC

,Profit

ATCP

Q

Profit = (PATC)Q

Or


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Showing a Profit on the Graph


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Determining Profit-Maximizing Price and Quantity

OUTPUT PERDAY

TOTAL

COST

MARGINAL COST

0

1

2

3

4

56

7

8

9

$1.00

1.50

1.75

2.25

3.00

4.005.25

6.75

8.50

10.50

-

$0.50

0.25

0.50

0.75

1.001.25

1.50

1.75

2.00


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Remember that Firms Maximize Total Profit, Not Profit per Unit


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Losing Money in the Medical Screening

Industry

Providing preventivemedical scans turned

out not to be a

profitable business.

LEARNING OBJECTIVE4


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Produce or to Shut Down in the Short Run

LEARNING OBJECTIVE4

In the short run a firm suffering losses has two choices:

Continue to produce

Stop production by shutting down temporarily

Sunk cost A cost that has already been paid and that

cannot be recovered.


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The Supply Curve of the Firm in the Short Run

Shutdown point The minimum point on a firms average variable costcurve; if the price falls below this point, the firm shuts down production in

the short run.

LEARNING OBJECTIVE5


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Economic Profit and the Entry or ExitDecision

LEARNING OBJECTIVE5


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Economic Profit and the Entry or Exit Decision

Economic profitA firms revenues

minus all its costs, implicit and explicit.

Economic loss The situation in which a

firms total revenue is less than its total

cost, including all implicit costs.


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Economic Profit and the Entry or Exit DecisionEXPLICIT COSTS

Water

Wages

Organic fertilizer

Electricity

Payment on bank loan

$25,000

$35,000

$14,000

$5,000

$6,000

IMPLICIT COSTS

Foregone salary

Opportunity cost of the $100,000 she has invested in herfarm

Total Cost

$30,000

$10,000

$125,000


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ECONOMIC PROFIT LEADS TO ENTRY OF NEW FIRMSThe Effect of Entry on Economic Profits


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ECONOMIC LOSSES LEAD TO EXIT OF FIRMS


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ECONOMIC LOSSES LEAD TO EXIT OF FIRMSThe Effect of Exit on Economic Losses (contd.)


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Long-Run Equilibrium in a PerfectlyCompetitive Market

Long-run competitive equilibrium

The situation in which the entry

and exit of firms have resulted inthe typical firm just breaking even.


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The Long-Run Supply Curve in a PerfectlyCompetitive Market

Long-run supply curveA

curve showing the relationshipin the long run between market

price and the quantity supplied.


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The Long-Run Supply Curve in a Perfectly

Competitive Market

LEARNING OBJECTIVE6


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Perfect Competition and Efficiency

LEARNING OBJECTIVE6

Productive Efficiency

Productive efficiency The situation in which agood or service is produced at the lowest possiblecost.


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How Productive Efficiency Benefits Consumers


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Perfect Competition and Efficiency

Allocative Efficiency

Firms will supply all those goods that provide consumers

with a marginal benefit at least as great as the marginal cost

of producing them:

The price of a good represents the marginal benefit consumers

receive from consuming the last unit of the good sold.

Perfectly competitive firms produce up to the point where the price ofthe good equals the marginal cost of producing the last unit.

Therefore, firms produce up to the point where the last unit provides a

marginal benefit to consumers equal to the marginal cost of

producing it.


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Allocative Efficiency

Allocative efficiencyA state of theeconomy in which production reflects

consumer preferences; in particular, everygood or service is produced up to the point

where the last unit provides a marginal

benefit to consumers equal to the marginalcost of producing it.

2d2a8perfect competition

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