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AP MIcro Perfect Competition

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  • 1. 23
    C H A P T E R
    Pure Competition
  • 2. FOUR MARKET MODELS
    Pure Competition
    Market Structure Continuum
  • 3. FOUR MARKET MODELS
    Imperfect Competition
    All Markets that are
    Not Purely Competitive
    Pure
    Competition
    Market Structure Continuum
  • 4. FOUR MARKET MODELS
    Pure Monopoly
    Pure
    Competition
    Market Structure Continuum
  • 5. FOUR MARKET MODELS
    Monopolistic Competition
    Pure
    Monopoly
    Pure
    Competition
    Market Structure Continuum
  • 6. FOUR MARKET MODELS
    Oligopoly
    Pure
    Monopoly
    Pure
    Competition
    Monopolistic
    Competition
    Market Structure Continuum
  • 7. FOUR MARKET MODELS
    Pure Competition:
    • Very Large Numbers
    • 8. Standardized Product
    • 9. “Price Takers”
    • 10. Free Entry and Exit
    Pure
    Monopoly
    Pure
    Competition
    Monopolistic
    Competition
    Oligopoly
    Market Structure Continuum
  • 11. DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Perfectly Elastic Demand
    Price Taker Role
    For example...
  • 12. DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    $131
    0
    $ 0
  • 13. ]
    DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    $131
    131
    0
    1
    $ 0
    131
    $131
  • 14. ]
    ]
    DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    $131
    131
    131
    0
    1
    2
    $ 0
    131
    262
    $131
    131
  • 15. ]
    ]
    ]
    DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    $131
    131
    131
    131
    0
    1
    2
    3
    $ 0
    131
    262
    393
    $131
    131
    131
  • 16. ]
    ]
    ]
    ]
    DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    $131
    131
    131
    131
    131
    0
    1
    2
    3
    4
    $ 0
    131
    262
    393
    524
    $131
    131
    131
    131
  • 17. ]
    ]
    ]
    ]
    ]
    ]
    ]
    ]
    ]
    ]
    DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    $131
    131
    131
    131
    131
    131
    131
    131
    131
    131
    131
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    $ 0
    131
    262
    393
    524
    655
    786
    917
    1048
    1179
    1310
    $131
    131
    131
    131
    131
    131
    131
    131
    131
    131
  • 18. ]
    ]
    ]
    ]
    ]
    ]
    ]
    ]
    ]
    ]
    DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
    Product Price (P)
    (Average Revenue)
    Total
    Revenue (TR)
    Marginal
    Revenue (MR)
    Quantity
    Demanded (Q)
    Graphically
    Presented…
    $131
    131
    131
    131
    131
    131
    131
    131
    131
    131
    131
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    $ 0
    131
    262
    393
    524
    655
    786
    917
    1048
    1179
    1310
    $131
    131
    131
    131
    131
    131
    131
    131
    131
    131
  • 19. DEMAND, MARGINAL REVENUE, AND TOTAL
    REVENUE IN PURE COMPETITION
    TR
    1179
    1048
    917
    786
    655
    524
    393
    262
    131
    0
    Price and revenue
    D = MR
    1 2 3 4 5 6 7 8 9 10
    Quantity Demanded (sold)
  • 20. SHORT-RUN PROFIT MAXIMIZATION
    Two Approaches...
    First:
    Total-Revenue -Total Cost Approach
    The Decision Process:
    • Should the firm produce?
    • 21. What quantity should be produced?
    • 22. What profit or loss will be realized?
    The Decision Rule:
    Produce in the short-run if it can realize
    1- A profit (or)
    2- A loss less than its fixed costs
  • 23. SHORT-RUN PROFIT MAXIMIZATION
    Applied
    Graphically…
    Two Approaches...
    First:
    Total-Revenue -Total Cost Approach
    The Decision Process:
    • Should the firm produce?
    • 24. What quantity should be produced?
    • 25. What profit or loss will be realized?
    The Decision Rule:
    Produce in the short-run if it can realize
    1- A profit (or)
    2- A loss less than its fixed costs
  • 26. Can you see the
    profit maximization?
    TOTAL REVENUE-TOTAL COST APPROACH
    Total
    Fixed
    Cost
    Total
    Variable
    Cost
    Price: $131
    Total
    Cost
    Total
    Product
    Total
    Revenue
    Profit
    $ 100
    100
    100
    100
    100
    100
    100
    100
    100
    100
    100
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    $ 0
    131
    262
    393
    524
    655
    786
    917
    1048
    1179
    1310
    $ 0
    90
    170
    240
    300
    370
    450
    540
    650
    780
    930
    - $100
    - 59
    - 8
    + 53
    + 124
    + 185
    + 236
    + 277
    + 298
    + 299
    + 280
    $ 100
    190
    270
    340
    400
    470
    550
    640
    750
    880
    1030
  • 27. Graphing Total
    Cost & Revenue
    TOTAL REVENUE-TOTAL COST APPROACH
    Total
    Fixed
    Cost
    Total
    Variable
    Cost
    Price: $131
    Total
    Cost
    Total
    Product
    Total
    Revenue
    Profit
    $ 100
    100
    100
    100
    100
    100
    100
    100
    100
    100
    100
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    $ 0
    131
    262
    393
    524
    655
    786
    917
    1048
    1179
    1310
    $ 0
    90
    170
    240
    300
    370
    450
    540
    650
    780
    930
    - $100
    - 59
    - 8
    + 53
    + 124
    + 185
    + 236
    + 277
    + 298
    + 299
    + 280
    $ 100
    190
    270
    340
    400
    470
    550
    640
    750
    880
    1030
  • 28. TOTAL REVENUE-TOTAL COST APPROACH
    Break-Even Point
    (Normal Profit)
    $1,800
    1,700
    1,600
    1,500
    1,400
    1,300
    1,200
    1,100
    1,000
    900
    800
    700
    600
    500
    400
    300
    200
    100
    0
    Total
    Revenue
    Maximum
    Economic
    Profits
    $299
    Total revenue and total cost
    Total
    Cost
    Break-Even Point
    (Normal Profit)
    1 2 3 4 5 6 7 8 9 10 11 12 13 14
  • 29. SHORT-RUN PROFIT MAXIMIZATION
    Two Approaches...
    First:
    Total-Revenue -Total Cost Approach
    Second:
    Marginal-Revenue -Marginal Cost Approach
    MR = MC Rule
    Three Characteristics of MR=MC Rule:
    • The rule applies only if producing is preferred to shutting down
    • 30. Rule applies to all markets
    • 31. Rule can be restated P=MC
  • The
    same profit
    maximizing
    result!
    MARGINAL REVENUE-MARGINAL COST APPROACH
    Average
    Total
    Cost
    Average
    Fixed
    Cost
    Average
    Variable
    Cost
    Price =
    Marginal
    Revenue
    Total
    Economic
    Profit/Loss
    Total
    Product
    Marginal
    Cost
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    $100.00
    50.00
    33.33
    25.00
    20.00
    16.67
    14.29
    12.50
    11.11
    10.00
    $90.00
    85.00
    80.00
    75.00
    74.00
    75.00
    77.14
    81.25
    86.67
    93.00
    $190.00
    135.00
    113.33
    100.00
    94.00
    91.67
    91.43
    93.75
    97.78
    103.00
    - $100
    - 59
    - 8
    + 53
    + 124
    + 185
    + 236
    + 277
    + 298
    + 299
    + 280
    $ 131
    131
    131
    131
    131
    131
    131
    131
    131
    131
    90
    80
    70
    60
    70
    80
    90
    110
    130
    150
  • 32. MARGINAL REVENUE-MARGINAL COST APPROACH
    Average
    Total
    Cost
    Average
    Fixed
    Cost
    Average
    Variable
    Cost
    Price =
    Marginal
    Revenue
    Total
    Economic
    Profit/Loss
    Total
    Product
    Marginal
    Cost
    Graphically
    0
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    $100.00
    50.00
    33.33
    25.00
    20.00
    16.67
    14.29
    12.50
    11.11
    10.00
    $90.00
    85.00
    80.00
    75.00
    74.00
    75.00
    77.14
    81.25
    86.67
    93.00
    $190.00
    135.00
    113.33
    100.00
    94.00
    91.67
    91.43
    93.75
    97.78
    103.00
    - $100
    - 59
    - 8
    + 53
    + 124
    + 185
    + 236
    + 277
    + 298
    + 299
    + 280
    $ 131
    131
    131
    131
    131
    131
    131
    131
    131
    131
    90
    80
    70
    60
    70
    80
    90
    110
    130
    150
  • 33. MARGINAL REVENUE-MARGINAL COST APPROACH
    Profit Maximization Position
    $200
    150
    100
    50
    0
    Economic Profit
    MC
    MR
    $131.00
    ATC
    Cost and Revenue
    AVC
    $97.78
    1 2 3 4 5 6 7 8 9 10
  • 34. MR = MC
    Optimum
    Solution
    MARGINAL REVENUE-MARGINAL COST APPROACH
    Profit Maximization Position
    $200
    150
    100
    50
    0
    Economic Profit
    MC
    MR
    $131.00
    ATC
    Cost and Revenue
    AVC
    $97.78
    1 2 3 4 5 6 7 8 9 10
  • 35. MARGINAL REVENUE-MARGINAL COST APPROACH
    Loss Minimization Position
    If the price is lowered from $131 to $81…
    the MR=MC rule still applies
    …but the MR = MC point changes.
  • 36. MARGINAL REVENUE-MARGINAL COST APPROACH
    Loss Minimization Position
    $200
    150
    100
    50
    0
    Economic Loss
    MC
    ATC
    Cost and Revenue
    AVC
    $91.67
    MR
    $81.00
    1 2 3 4 5 6 7 8 9 10
  • 37. MARGINAL REVENUE-MARGINAL COST APPROACH
    Short-Run Shut Down Point
    $200
    150
    100
    50
    0
    MC
    ATC
    Cost and Revenue
    AVC
    MR
    $71.00
    Minimum AVC
    is the Shut-Down
    Point
    1 2 3 4 5 6 7 8 9 10
  • 38. MARGINAL REVENUE-MARGINAL COST APPROACH
    Marginal Cost & Short-Run Supply
    Observe the impact upon profitability as price is changed
    Quantity
    Supplied
    Maximum Profit (+)
    Or Minimum Loss (-)
    Price
    $151
    131
    111
    91
    81
    71
    61
    10
    9
    8
    7
    6
    0
    0
    $+480
    +299
    +138
    -3
    -64
    -100
    -100
  • 39. MARGINAL REVENUE-MARGINAL COST APPROACH
    Marginal Cost & Short-Run Supply
    Break-even
    (Normal Profit)
    Point
    MC
    MR5
    P5
    ATC
    MR4
    P4
    Cost and Revenue, (dollars)
    AVC
    MR3
    P3
    MR2
    P2
    MR1
    P1
    Do not
    Produce –
    Below AVC
    Q2
    Q3
    Q4
    Q5
    Quantity Supplied
  • 40. MARGINAL REVENUE-MARGINAL COST APPROACH
    Marginal Cost & Short-Run Supply
    Yields the
    Short-Run
    Supply Curve
    Supply
    MC
    MR5
    P5
    MR4
    P4
    Cost and Revenue, (dollars)
    MR3
    P3
    MR2
    P2
    MR1
    P1
    No
    Production
    Below AVC
    Q2
    Q3
    Q4
    Q5
    Quantity Supplied
  • 41. MARGINAL REVENUE-MARGINAL COST APPROACH
    MC1
    S1
    Cost and Revenue, (dollars)
    AVC1
    Quantity Supplied
    Marginal Cost & Short-Run Supply
    MC2
    S2
    AVC2
    Higher Costs Move the
    Supply Curve to the Left
  • 42. MARGINAL REVENUE-MARGINAL COST APPROACH
    MC1
    S1
    Cost and Revenue, (dollars)
    AVC1
    Quantity Supplied
    Marginal Cost & Short-Run Supply
    Lower Costs Move
    the Supply Curve
    to the Right
    MC2
    S2
    AVC2
  • 43. SHORT-RUN COMPETITIVE EQUILIBRIUM
    The Competitive Firm “Takes” its
    Price from the Industry Equilibrium
    S= MCs
    P
    P
    Economic
    Profit
    ATC
    S=MC
    D
    $111
    $111
    AVC
    D
    Q
    Q
    8
    8000
    Firm
    (price taker)
    Industry
  • 44. SHORT-RUN COMPETITIVE EQUILIBRIUM
    How about the
    long-run?
    The Competitive Firm “Takes” its
    Price from the Industry Equilibrium
    S= MCs
    P
    P
    Economic
    Profit
    ATC
    S=MC
    D
    $111
    $111
    AVC
    D
    Q
    Q
    8
    8000
    Firm
    (price taker)
    Industry
  • 45. PROFIT MAXIMIZATION IN THE LONG RUN
    Assumptions...
    • Entry and Exit Only
    • 46. Identical Costs
    • 47. Constant-Cost Industry
    Goal of the Analysis
    Price = Minimum ATC
    Long-Run Equilibrium - The
    Zero Economic Profit Model
  • 48. PROFIT MAXIMIZATION IN THE LONG RUN
    P
    P
    $60
    50
    40
    $60
    50
    40
    Q
    Q
    100
    100,000
    Firm
    (price taker)
    Industry
    Temporary profits and the reestablishment
    of long-run equilibrium
    S1
    MC
    ATC
    MR
    D1
  • 49. P
    P
    $60
    50
    40
    $60
    50
    40
    Q
    Q
    100
    100,000
    Firm
    (price taker)
    Industry
    PROFIT MAXIMIZATION IN THE LONG RUN
    An increase in demand increases profits…
    Economic
    Profits
    S1
    MC
    ATC
    MR
    D2
    D1
  • 50. PROFIT MAXIMIZATION IN THE LONG RUN
    P
    P
    $60
    50
    40
    $60
    50
    40
    Q
    Q
    100
    100,000
    Firm
    (price taker)
    Industry
    New competitors increase supply, and lower
    prices decrease economic profits.
    Zero Economic
    Profits
    S1
    S2
    MC
    ATC
    MR
    D2
    D1
  • 51. PROFIT MAXIMIZATION IN THE LONG RUN
    P
    P
    $60
    50
    40
    $60
    50
    40
    Q
    Q
    100
    100,000
    Firm
    (price taker)
    Industry
    Decreases in demand, losses, and the
    reestablishment of long-run equilibrium
    S1
    MC
    ATC
    MR
    D1
  • 52. P
    P
    $60
    50
    40
    $60
    50
    40
    Q
    Q
    100
    100,000
    Firm
    (price taker)
    Industry
    PROFIT MAXIMIZATION IN THE LONG RUN
    A decrease in demand creates losses…
    Economic
    Losses
    S1
    MC
    ATC
    MR
    D1
    D2
  • 53. P
    P
    $60
    50
    40
    $60
    50
    40
    Q
    Q
    100
    100,000
    Firm
    (price taker)
    Industry
    PROFIT MAXIMIZATION IN THE LONG RUN
    Competitors with losses decrease supply, and
    prices return to zero economic profits.
    S3
    Return to Zero
    Economic Profits
    S1
    MC
    ATC
    MR
    D1
    D2
  • 54. LONG-RUN SUPPLY IN A
    CONSTANT COST INDUSTRY
    Constant Cost Industry
    Perfectly Elastic
    Long-Run Supply
    Graphically...
  • 55. LONG-RUN SUPPLY IN A
    CONSTANT COST INDUSTRY
    P
    P1
    P2
    P3
    Z3
    Z1
    Z2
    S
    =$50
    D3
    D1
    D2
    Q
    Q1
    Q2
    Q3
    100,000
    110,000
    90,000
  • 56. LONG-RUN SUPPLY IN A
    CONSTANT COST INDUSTRY
    How does an increasing
    cost industry differ?
    P
    P1
    P2
    P3
    Z3
    Z1
    Z2
    S
    =$50
    D3
    D1
    D2
    Q
    Q1
    Q2
    Q3
    100,000
    110,000
    90,000
  • 57. LONG-RUN SUPPLY IN AN
    INCREASING COST INDUSTRY
    P
    S
    P1
    P2
    P3
    $55
    50
    45
    Y2
    Y1
    Y3
    D1
    D2
    D3
    Q
    Q1
    Q2
    Q3
    100,000
    110,000
    90,000
  • 58. How does a
    decreasing cost
    industry differ?
    LONG-RUN SUPPLY IN AN
    INCREASING COST INDUSTRY
    P
    S
    P1
    P2
    P3
    $55
    50
    45
    Y2
    Y1
    Y3
    D1
    D2
    D3
    Q
    Q1
    Q2
    Q3
    100,000
    110,000
    90,000
  • 59. LONG-RUN SUPPLY IN AN
    INCREASING COST INDUSTRY
    What is the long-
    run competitive
    equilibrium?
    P
    S
    P1
    P2
    P3
    $55
    50
    45
    Y2
    Y1
    Y3
    D1
    D2
    D3
    Q
    Q1
    Q2
    Q3
    100,000
    110,000
    90,000
  • 60. LONG-RUN EQUILIBRIUM
    FOR A COMPETITIVE FIRM
    MC
    ATC
    Price
    MR
    P
    Price = MC = Minimum ATC
    (normal profit)
    Q
    Quantity
  • 61. PURE COMPETITION AND EFFICIENCY
    Productive Efficiency
    Price = Minimum ATC
    Allocative Efficiency
    Price = MC
    Underallocation
    Price > MC
    Overallocation
    Price < MC
  • 62. Resources are
    efficiently allocated
    under competition
    PURE COMPETITION AND EFFICIENCY
    Productive Efficiency
    Price = Minimum ATC
    Allocative Efficiency
    Price = MC
    Underallocation
    Price > MC
    Overallocation
    Price < MC
  • 63. Consumer
    Surplus
    PURE COMPETITION AND EFFICIENCY
    Productive Efficiency
    Price = Minimum ATC
    Allocative Efficiency
    Price = MC
    Underallocation
    Price > MC
    Overallocation
    Price < MC
  • 64. PURE COMPETITION AND EFFICIENCY
    Productive Efficiency
    Price = Minimum ATC
    Allocative Efficiency
    Price = MC
    Underallocation
    Price > MC
    Overallocation
    Price < MC
  • 65. Coming Next...
    Pure Monopoly
    Chapter 24