comp perfecta ch11

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2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e.

Fernando & Yvonn

Quijano

Prepared by:

Chapter

11

Firms in Perfectly

Competitive Markets


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te 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick OBrien, 2e. 2 of 37

Firms in Perfectly Competitive Markets

MARKET STRUCTURE

CHARACTERISTICPERFECTCOMPETITION

MONOPOLISTICCOMPETITION OLIGOPOLY MONOPOLY

Number of firms

Type of product

Ease of entry

Examples ofindustries

Many

Identical

High

Wheat Apples

Many

Differentiated

High

Selling DVDs Restaurants

Few

Identical ordifferentiated

Low

Manufacturingcomputers

Manufacturingautomobiles

One

Unique

Entry blocked

First-classmail delivery

Tap water

Table 11-1The Four Market Structures


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Learning Objective 11.1

Perfectly competitive market A marketthat meets the conditions of (1) manybuyers and sellers, (2) all firms sellingidentical products, and (3) no barriers tonew firms entering the market.

Price taker A buyer or seller that isunable to affect the market price.

A Perfectly Competitive Firm Cannot Affect the Market Price

Perfectly Competitive Markets


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FIGURE 11-1

A Perfectly Competitive Firm

Faces a Horizontal Demand

Curve


The Demand Curve for the Output

of a Perfectly Competitive Firm


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FIGURE 11-2

The Market Demand for Wheat versus

the Demand for One Farmers Wheat

Dont Let This Happen toYOU!Dont Confuse the Demand Curve for Farmer Parkers Wheat with the Market Demand Curve forWheat


The Demand Curve for the Output

of a Perfectly Competitive Firm


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How a Firm Maximizes Profit in a Perfectly

Competitive Market


Profit Total revenue minus total cost.

Profit = TR TC

Revenue for a Firm in a Perfectly Competitive Market

Average revenue (AR) Total revenuedivided by the quantity of the product sold.

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

or,quantityinChange

revenuein totalChangeRevenueMarginal

Q

TRMR

==


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Competitive Market


Table 11-2

Farmer Parkers Revenue from Wheat Farming

NUMBER OF

BUSHELS(Q)

MARKET PRICE

(PER BUSHEL)(P)

TOTAL

REVENUE(TR)

AVERAGE

REVENUE(AR)

MARGINAL

REVENUE(MR)

0

1

2

3

4

5

6

7

8

9

10

$4

4

4

4

4

4

4

4

4

4

4

$0

4

8

12

16

20

24

28

32

36

40

-

$4

4

4

4

4

4

4

4

4

4

-

$4

4

4

4

4

4

4

4

4

4

Revenue for a Firm in a Perfectly Competitive Market


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Competitive Market


Determining the Profit-Maximizing Level of Output

Table 11-3

Farmer Parkers Profits from Wheat Farming

QUANTITY(BUSHELS)

(Q)

TOTALREVENUE

(TR)

TOTALCOSTS

(TC)

PROFIT

(TR-TC)

MARGINALREVENUE

(MR)

MARGINALCOST

(MC)

0

1

2

3

4

5

6

7

8

9

10

$0.00

4.00

8.00

12.00

16.00

20.00

24.00

28.00

32.00

36.00

40.00

$1.00

4.00

6.00

7.50

9.50

12.00

15.00

19.50

25.50

32.50

40.50

$1.00

0.00

2.00

4.50

6.50

8.00

9.00

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

2.002.50

3.00

4.50

6.00

7.00

8.00


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Competitive Market



FIGURE 11-3

The Profit-Maximizing Level of Output


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Competitive Market



1 The profit-maximizing level of output is where thedifference between total revenue and total costis the greatest.

2 The profit-maximizing level of output is alsowhere marginal revenue equals marginal cost,orMR= MC.

From the information in Table 11-3 and Figure 11-3, wecan draw the following conclusions:


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Illustrating Profit or Loss on the Cost Curve Graph


Profit = (Px Q) TC

Q

QP )(=

Q

Profit

Q

TC

P ATCQ=

Profit

Profit = (PATC)Q

or


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Showing a Profit on the Graph

FIGURE 11-4

The Area of Maximum Profit



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1 P>ATC, which means the firm makes a profit.

2 P=ATC, which means the firm breaks even (its totalcost equals its total revenue).

3 P


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FIGURE 11-5

A Firm Breaking Even and a Firm Experiencing Losses

Illustrating When a Firm Is Breaking Even

or Operating at a Loss



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Deciding Whether to Produce

or to Shut Down in the Short Run


1 Continue to produce

2 Stop production by shutting downtemporarily

Sunk cost A cost that has already been

paid and that cannot be recovered.

In the short run, a firm suffering losses hastwo choices:

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Shutdown point The minimum point on a firmsaverage variable cost curve; if the price falls belowthis point, the firm shuts down production in the short

run.

The Supply Curve of a Firm in the Short Run

Total revenue < Variable cost,

P Q < VC

P


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FIGURE 11-6

The Firms Short-Run Supply Curve



The Supply Curve of a Firm in the Short Run

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If Everyone Can Do It, You Cant Make Money at It:

The Entry and Exit of Firms in the Long Run


Economic Profit and the Entry or Exit Decision

Table 11- 4

Farmer Morenos Costs per Year

EXPLICIT COSTS

Water

WagesOrganic fertilizer

Electricity

Payment on bank loan

$10,000

$15,000$10,000

$5,000

$45,000

IMPLICIT COSTS

Foregone salary

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

Total Cost

$30,000

$10,000

$125,000

Economic profit A firms revenuesminus all its costs, implicit and explicit.

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Economic Profit Leads to Entry of New Firms

FIGURE 11-8

The Effect of Entry on Economic Profits


The Entry and Exit of Firms in the Long RunEconomic Profit and the Entry or Exit Decision

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FIGURE 11-9

The Effect of Exit on Economic Losses

Economic Losses Lead to Exit of Firms



Learning Objective 11 5


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FIGURE 11-9

The Effect of Exit on Economic Losses (continued)






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Economic loss The situation in whicha firms total revenue is less than its

total cost, including all implicit costs.

Long-Run Equilibrium in a Perfectly Competitive Market

Long-run competitive equilibrium

The situation in which the entry and exitof firms has resulted in the typical firmbreaking even.






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FIGURE 11-10

The Long-Run Supply Curve in a Perfectly Competitive Industry



The Long-Run Supply Curve in a Perfectly Competitive Market



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Long-run supply curve A curve thatshows the relationship in the long runbetween market price and the quantitysupplied.

Increasing-Cost and Decreasing-Cost Industries

Industries with upward-sloping long run supply

curves are called increasing-cost industries.

Industries with downward-sloping long-run supplycurves are called decreasing-cost industries.



The Long-Run Supply Curve in a Perfectly Competitive Market

comp perfecta ch11

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