microeconomics ch 22
TRANSCRIPT
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M i c r o e c o n o m i c
s
Dr. Karim Kobeissi
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Chapter 22: The Competitive Firm
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Four Distinct Market Models
• 1) Pure Monopoly
• One frm--sole seller o a specifc product (e.g., electricity), the price is usually regulated by the government.
• 2) Oliopoly
• e! sellers (e.g., cars producers), di"erentiated products,must ta#e prices o others into account !hen determining its
o!n price and strategies.
• !) Monopolistic Competition
– " Many sellers (e.g., clothes producers), !ho trade over a
range o prices.
– - $ellers can di"erentiate their o"ers to buyers .
• #) Per$ect or Pure Competition
•Many sellers o an identical product (e.g., sugar)
%%priceta#ers&.
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Efficient Markets Mean Loss of Pricing Control
The market structure distinction is e&tremelyimportant $or sellers 'ecause i$ price transparency eventually results in a completely e(cient market%sellers ill have no control over prices *they'ecome price ta#ers)+the result ill 'e pure
competition.
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actors 'hat Ma#e Mar#ets erectly ompetitive
• 1) ,ery lare num'er o$ sellers:
e&les include $arm commodities% stockmarket% and $orein e&chane markets.
• 2) -tandardied product: i$ the price is
the same% 'uyers ill 'e indi/erent a'outhich seller they 'uy a 0homoeneousproduct $rom.
• !) 0Price Takers: individual rms e&ertno sinicant control over price.
• #) Free entry and e&it: no o'stacles to
entry""leal% technoloical% nancial etc.
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3 CompetitiveFirm
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Demand Curve o$ a Competitive Firm
* competitive frm !hich has a perect
demand curve+
For any price increase Demand ill drop to ero%
'ecause customers ill 'uy $rom somehere else
at the e4uili'rium price The rm cannot o'tain
a hiher price 'y restrictin its output5 nor does it
have to loer price to increase its sales volume.
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This does 6OT mean that M3789T demand is
per$ectly elastic. n $act% TOT3;"D9M36D
curves $or most aricultural products is very
69;3-TC.
<oever% the demand schedule $or the
6D,D=3; rm in a purely competitive
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• 3 rm?s prot $unction:
Prot *4)@ Π(q) @ Total revenue*4) " Total cost*4)
Or% a $unction is ma&imum hen its derivative is
e4ual to ero A Π B A4 @
• The rm ma&imies its prot 'y producin 4here:
ETotal revenue*4)?"ETotal cost*4)?@
Marinal 7evenue G Marinal Cost @ Marinal 7evenue@Marinal Cost
M7 @ MC
Or M7 @ Price
M7 @ MC @ Price
-hort 7un Prot Ma&imiation
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9conomic Prot
The competitive rm ill ain prot
hen:
Price @ M7 H 3TC *3T P7OFT
M3IMJ6K L=36TT>).
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9conomic ;oss
The competitive rm ill loose hen:
Price @ M7 3TC *3T P7OFT
M3IMJ6K L=36TT>).
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; Mi i i ti N -h t D 7 l
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;oss Minimiation N -hut"Don 7ule
" -uppose that P 3TC. -ince the rm is
e&periencin a loss% should it shut don;et us compare the prots o$ producin L to the
prots hen the rm shuts don:
hen the $irm shut don: Q *) @ " Fi&ed Cost
hen the $irm produce L: Q *L) @ PRL " FC " ,C
There$ore% Q*L) H Q*) hen PRL H ,C.
Divide 'oth sides 'y L: P H 3,C.
• $ P H 3,C% then producin L is 'etter thanshuttin don -tay in 'usiness .
• $ P 3,C then it is impossi'le to do 'etter
than shuttin don.
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-unk Costs
Sunk costs are costs that are
already incurred and cannot 'e
recovered.
6otice that the rm?s &ed costs
did not a/ect hether or not to
shut don. 3ll &ed costs are
- k C t
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-unk Cos ts
• n the 1SUs ;ockhead spent V 1
'illion
developin a ne airplane *Tristar).3$ter
sinkin the money% it as clear thatthe venture as not oin to 'e a
success.• ;ockhead ent to its creditors%
and asked
$or more money% sayin% 0e have
- k C t
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-unk Cos ts
-ome o$ the creditors said% 0hy
put in
more money% since there is no ay
e can
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ho as
riht
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-unk Costs
3nser: Both arguments are wrong.
The billion dollar initial investment is
a sunk cost that is irrelevant to
the decision.
We should compare the
extra revenue of
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0Don?t cry over spiltmilk
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-unk Costs
n the lon run% -ome &ed costs
remain sunk hile others miht not
'e.
For e&le% n the lon run% you can
sell your $actory and e&it the industry
i$ the prots remain neative.
-hort 7un -upply Curve
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-hort 7un -upply Curve
The supply curve o$ a rm correspond to
the set o$ couples: 4uantity supplied $oreach price level.
Wecause the rm?s marinal cost curve *MC)determines ho much the rm is illin tosupply at any price% it is the competitivefrm’s supply curve (M ! Supply urve".
n the short run% the supply curve o$ aper$ectly competitive rm correspond to the
marinal cost curve in its part a'ove 3,C.
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The Fi rm ? s ;on 7un D ec i s i on
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The Fi rm ? s ;on 7un D ec i s i on
• n the lon run% a prot"ma&imiin rm
ould e&it the industry i$ T7 TC at alloutput levels.
• Dividin 'y L% the condition $or e&it is:
P 3TC
–Market supply decreases
–Price rises
–;osses decline until loss @ prot @ *and e&ist stops).
The Fi rm ? s ;on 7un D ec i s i on
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The Fi rm s ;on 7un D ec i s i on
• Firms enter i$ P H 3TC
–Market supply increases
–Price declines
–Prot declines until prot @ *and
entry stops).
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;on 7un -upply Curve
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;on 7un -upply Curve
3 per$ectly competitive rm?slong run supply curve is #
below $T% and correspond
to the M curve in its part
a'ove 3TC *;73C).
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;on 7un Prot Ma&imiation
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;on 7un Prot Ma&imiation
The 4uantity at hich 3TC isminimied is the 4uantity
that ma&imies the rm?s
prot per unit *sometimes
called prot marin).
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