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Perfect Competition
These slides supplement the textbook, but should not replace reading the textbook
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What ismarket structure?
Important features of a market, such as the number of firms, product uniformity, ease of entry, and forms of competition
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What are the four types of Markets?
Perfect Competition Monopolistic Competition Oligopoly Monopoly
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What is aperfectly competitive
market?homogeneous product many buyers and sellers no one has much market
power easy entry & easy exit can sell all bring to market
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What is a price taker?
A firm that faces a given market price and whose actions have no effect on that market price
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Why is a firm that is part of a perfectly
competitive market a price taker?
Because if the firm charges higher than the market price it will not sell even one unit
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Pri
ce p
er u
nit
Quantity per period
Market Equilibrium in Perfect Competition
D
S
0Exhibit 1a
Surplus
Shortage
![Page 8: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/8.jpg)
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The Firm’s Demand Curve in Perfect Competition
Market quantity
P S
DIndividual quantity
P
d
8
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How does the firm maximize profit?
By finding the rate of output that makes total revenue minus total cost as large as possible
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7
Maximum economic profit = $12
12
TRTC$60
48
15Tot
al d
olla
rs
Quantity per period
Short-Run Profit MaximizationPanel A: TR minus TC
151050Exhibit 3a
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What is marginal revenue?
The change in total revenue resulting from a one-unit change in sales
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What is marginal cost?
The change in total cost resulting from a one-unit change in sales
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At what point are profits maximized?At the level of output where MR = MC, or the last unit of output where MR > MC
![Page 14: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/14.jpg)
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Q MR TR TC MC ATC Profit
10 5 50 40.00 2.75 4.00 10.00 11 5 55 43.25 3.25 3.93 11.7512 5 60 48.00 4.75 4.00 12.0013 5 65 54.50 6.50 4.19 10.5014 5 70 64.00 9.50 4.57 6.00
Exhibit 2
Maximizing Profits in the Short-Run
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Why does MR = P in Perfect Competition?
Because no matter how many units are brought to market, the firm can sell all of them at the market price
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What isaverage revenue?
Total revenue divided by output
TR / Q
![Page 17: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/17.jpg)
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Why does AR=P in all markets?
Because each unit is sold for the same price
at one point in time
![Page 18: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/18.jpg)
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Tot
al d
olla
rs
Quantity per period
Short-Run Profit MaximizationPanel B: MR equals MC
120
$5$4
Profit
d = MR = AR ATCMCea
Exhibit 3b
![Page 19: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/19.jpg)
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At what point are losses minimized?
At the level of output where MR = MC, or the last unit of output where MR > MC
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Q MR TR TC MC ATC Loss
8 3 24 35.25 1.50 4.41 -11.25 9 3 27 37.25 2.00 4.14 -10.2510 3 30 40.00 2.75 4.00 -10.0011 3 33 43.25 3.25 3.93 -10.2512 3 36 48.00 4.75 4.00 -12.00
Exhibit 4
Minimizing Losses in the Short-Run
![Page 21: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/21.jpg)
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What will a firm do if average variable cost exceeds price at every
level of production?Shut down
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$4030
15Tot
al d
olla
rs
Quantity per period
Minimizing Short-Run Losses
151050
Minimum economic loss = $10
TRTC
Panel A: TC and TR
Exhibit 5a
![Page 23: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/23.jpg)
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$4.003.002.50
151050
Dol
lars
per
un
it
Quantity per period
Minimizing Short-Run Losses
MC
AVC
ATC
d = MR = AR
Panel B: MC equals MR
Exhibit 5b
Loss
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What is the firm’s short-run supply curve?
A curve that indicates the quantity a firm supplies at each price in the short run
![Page 25: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/25.jpg)
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Dol
lars
per
un
it
Quantity per period
Summary of Short-Run Output Decisions
p1
p2
p3
p4
p5
q2 q3 q4 q5
MCATC
AVC
Shutdown point
Break-even point
d1
d2
d3
d4
d5
Exhibit 5
![Page 26: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/26.jpg)
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What is the firm’s short run supply curve?
That portion of its MC curve which lies above its AVC curve
![Page 27: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/27.jpg)
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Tot
al d
olla
rs
Quantity per period
Relationship between Short-Run Profit Maximization and Market Equilibrium
Panel A: Firm
121050
$54 Profit d=MR
ATCMC = s
Exhibit 8a
AVC
![Page 28: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/28.jpg)
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What is the industry’s short-run supply curve?
A curve that indicates the quantity all firms in an industry supply at each price in the short run
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Aggregating Individual Supply to Form Market Supply
Panel A: Firm AP
rice
per
un
it
Quantity per period
p'
p
10 200
SA
Exhibit 7a
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Aggregating Individual Supply to Form Market Supply
Panel B: Firm BP
rice
per
un
it
Quantity per period
p'
p
10 200
SB
Exhibit 7b
![Page 31: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/31.jpg)
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Aggregating Individual Supply to Form Market Supply
Panel C: Firm CP
rice
per
un
it
Quantity per period
p'
p
10 200
SC
Exhibit 7c
![Page 32: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/32.jpg)
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Aggregating Individual Supply to Form Market Supply
Panel D: Industry, or market supply
Pri
ce p
er u
nit
Quantity per period
p'
p
30 60
SA + SB + SC = S
0Exhibit 7d
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Pri
ce p
er u
nit
Quantity per period
Relationship between Short-Run Profit Maximization and Market Equilibrium
Panel B: Industry, or market
12,0000
$5
D
MC = S
Exhibit 8b
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What is economic profit in the long run?
Zero
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Dol
lars
per
un
it
Quantity per period
Long-Run Equilibrium for the Firm
q0
p d
ATCMCLRAC
e
Exhibit 9a
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Pri
ce p
er u
nit
Quantity per period
Long-Run Equilibrium for the Industry
Q0
p
D
S
Exhibit 9b
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What is the long-run industry supply curve?A curve that shows the relationship between price and quantity supplied once firms fully adjust to any change in market demand
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What is an increasing-cost
industry?An industry that faces higher per-unit production costs as industry output expands in the long run
![Page 39: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/39.jpg)
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Upward sloping
What is the shape of the long-run industry supply
curve in an increasing cost industry?
![Page 40: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/40.jpg)
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What is production efficiency?
The condition that exists when output is produced with the least-cost combination of inputs, given the state of technology
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What is allocative efficiency?The condition that exists when firms produce the output that is most preferred by consumers
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What is the the marginal cost of each
good equal to?The marginal benefit consumers derive from that good
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What is consumer surplus?
The difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays
![Page 44: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/44.jpg)
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What is producer surplus?
The amount by which total revenue from production exceeds total variable cost
![Page 45: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/45.jpg)
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Consumer Surplus and Producer Surplus for a Competitive Market in the
Short RunD
olla
rs p
er u
nit
Quantity per period
5
$10
0
10,000 20,00012,000
6
e
m
S
D
Consumer surplusProducer surplus
Exhibit 14
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END
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Appendix
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What is a constant-cost industry?
An industry that can expand or contract without affecting the long-run per-unit cost of production
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What is the shape of the long-run industry
supply curve?horizontal
![Page 50: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/50.jpg)
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Dol
lars
per
un
it
Quantity per periodq0
p d
ATC
MC
LRAC
d'Profit
q'
p'
Panel A: the Firm
Exhibit 10a
Long-Run Adjustment to an Increase in Demand in a Constant Cost Industry
![Page 51: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/51.jpg)
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Dol
lars
per
un
it
Quantity per period
Long-Run Adjustment to a Decrease in Demand in a Constant Cost
Industry for the Firm
q0
p d
ATCMCLRAC
e
p''
q''
d''Loss
Exhibit 11a
![Page 52: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/52.jpg)
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Dol
lars
per
un
it
Quantity per period
Long-Run Adjustment to an Increase in Demand in a Constant Cost Industry
Qb0
p
Qc
p'
Qa
S*
S'S
D'D
ab
c
Exhibit 10b
![Page 53: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/53.jpg)
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Dol
lars
per
un
it
Quantity per periodQf0
p''
Qa
p
Qg
S*
SS''
DD''
g a
f
Exhibit 11b
Long-Run Adjustment to a Decrease in Demand in a Constant Cost Industry
![Page 54: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/54.jpg)
54
Pri
ce p
er u
nit
Quantity per periodQb0
pa
pc
pb
QcQa
S*S'SD
D'a
bc
Exhibit 12b
Long-Run Adjustment to a Increase in Demand in an Increasing Cost Industry
![Page 55: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/55.jpg)
55
Dol
lars
per
un
it
Quantity per periodqb0
pa da
ATC
MC'
a
pc
q
dcc
pb
MC
ATC'dbb
Exhibit 12a
Long-Run Adjustment for the firm to an Increase in Demand in an
Increasing Cost Industry
![Page 56: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/56.jpg)
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What is a decreasing-cost
industry?The rare case in which an industry faces lower per-unit production costs as industry output expands in the long run
![Page 57: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/57.jpg)
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Downward sloping
What is the shape of the long-run industry supply
curve in a decreasing cost industry?
![Page 58: 1 Perfect Competition These slides supplement the textbook, but should not replace reading the textbook](https://reader035.vdocument.in/reader035/viewer/2022062517/56649f305503460f94c4a5cc/html5/thumbnails/58.jpg)
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Dol
lars
per
un
it
Quantity per period
A Decreasing-Cost Industry Adjusts to an Increase in Demand
0
papc
QcQa
S*
S'S
DD'
a
b
c
Exhibit 13