econ107 principles of microeconomics week 13 december 2013 1 13w/12/2013 dr. mazharul islam...
TRANSCRIPT
ECON107Principles of
MicroeconomicsWeek 13
DECEMBER 2013
1
Chapter-12
12PERFECT
COMPETITION
Lesson Objectives Define perfect competition
How perfect competition arises
Explain how a firm makes its output decision
Explain how price and output are determined in perfect competition
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Perfect Competition Perfect competition is a market in
which Many firms sell identical products to
many buyers (Standardized Product). There are no restrictions to entry into
the industry (Free Entry and Exit). Established firms have no advantages
over new ones (Price Takers). Sellers and buyers are well informed
about prices.
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How Perfect Competition Arises
Perfect competition arises when: the firm’s minimum efficient scale is
small relative to market demand so there is room for many firms in the market.
each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm’s good they buy.
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Perfect CompetitionA price taker is a firm that cannot influence the price of a good or service.No single firm can influence the price—it must “take” the equilibrium market price.Each firm’s output is a perfect substitute for the output of the other firms, so the demand for each firm’s output is perfectly elastic.
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Goals of Perfectly Competitive firm
The goal of each competitive firm is to maximize economic profit, which equals total revenue minus total cost.
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SHORT RUN PROFIT MAXIMIZATION
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Two Approaches...First: Total-Revenue -Total Cost Approach
The Decision Rule:Produce in the short-run if it can realize
1- A profit (or)2- A loss less than its fixed costs
The Decision Process:•Should the firm produce (Whether to enter or exit a market)?•What quantity should be produced?•What profit or loss will be realized (How to produce at
minimum cost)?
Second: Marginal-Revenue -Marginal Cost Approach
DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER
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$131 131
131131131131131131131131131
0 1 2
3456789
10
$ 0131262393524655786917
104811791310
$131131131131131131131131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
]]]]]]]]]]
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TR
D = MR
1 2 3 4 5 6 7 8 9 10
1179
1048
917
786
655
524
393
262
131
0
Pri
ce
an
d r
ev
enu
e
Quantity Demanded (sold)
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TotalCost
0 1 2
3456789
10
TotalProduct
TotalFixedCost
TotalVariable
CostTotal
Revenue Profit $ 100
100 100
100100100100100100100100
$ 090
170240300370450540650780930
$ 100190270340400470550640750880
1030
Price: $131
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0131262393524655786917
104811791310
Can you see the
profit maxim
ization?
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$1,8001,7001,6001,5001,4001,3001,2001,1001,000 900 800 700 600 500 400 300 200 100 0
To
tal r
eve
nu
e a
nd
to
tal c
ost
TotalRevenue
TotalCost
MaximumEconomic
Profits$299
Break-Even Point(Normal Profit)
Break-Even Point(Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
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Second: Marginal-Revenue -Marginal Cost Approach
Profit is maximized by producing the output at which marginal revenue (MR), equals marginal cost (MC).
MR = MC Rule
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AverageTotalCost
0 1 23456789
10
TotalProduct
AverageFixedCost
AverageVariable
Cost
Price =MarginalRevenue
TotalEconomicProfit/Loss
$100.00
50.00 33.3325.0020.0016.6714.2912.5011.1110.00
$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
$ 131131131131131131131131131131
MarginalCost
90807060708090
110130150
Graphically
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If MR > MC, economic profit increases if output increases.
If MR < MC, economic profit decreases if output increases.
If MR = MC, economic profit decreases if output changes in either direction, so economic profit is maximized.
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
Economic Profit
$131.00
$97.78AVC
ATC
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Second: Marginal-Revenue -Marginal Cost Approach
A firm’s shutdown point is the point at which it is indifferent between producing and shutting down.
This point is where AVC is at its minimum.
It is also the point at which the MC curve crosses the AVC curve.
17 Figure shows the shutdown point.
Minimum AVC is $17 a sweater.
If the price is $17, the profit-maximizing output is 7 sweaters a day.
The firm incurs a loss equal to the red rectangle. If the price of a sweater is between $17 and $20.14, the firm produces the quantity at which marginal cost equals price.
The firm covers all its variable cost and at least part of its fixed cost.
It incurs a loss that is less than TFC.
18Output, Price, and Profit in the Short Run
Market Supply in the Short RunThe short-run market supply curve shows the quantity supplied by all firms in the market at each price when each firm’s plant and the number of firms remain the same.
19Output, Price, and Profit in the Short Run
Co
st a
nd
Rev
enu
e, (
do
llar
s)
MC
MR1
AVC
ATC
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Do notProduce –Below AVC
Break-even(Normal Profit)Point
20Output, Price, and Profit in the Short Run
Co
st a
nd
Rev
enu
e, (
do
llar
s)
MC
MR1
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Yields theShort-Run
Supply Curve
Supply
NoProductionBelow AVC
21 At a price equal to minimum AVC, the shutdown price, some firms will produce the shutdown quantity and others will produces zero.
The market supply curve is perfectly elastic.
Short-Run Equilibrium
Short-run market supply and market demand determine the market price and output.
Figure shows a short-run equilibrium.
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Now it’s over for today. Do Now it’s over for today. Do you have any question? you have any question?
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