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Firms in competitive market

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    Firms in competitive market Firms in competitive market Presentation Transcript

    • Firms in competitive Market
    • Market
      It is a social arrangement that allows buyers & seller to discover information and carryout voluntary exchange of goods or services.
      Mainly 4 kind of markets are there,
      Monopoly
      Oligopoly
      Monopolistic
      Perfect
    • Perfect Competition
      Meaning
      Characteristics
      Large no. of buyers & sellers
      Homogenous product
      Easy to enter & exit
      Perfect knowledge to both seller & buyer
      Perfect mobility
      Seller are price taker
      Straight horizontal line demand curve
    • Conti…
      As a result of these characteristics, the perfectly competitive market has the following outcomes:
      The actions of any single buyer or seller in the market have no impact on the market price.
      Each buyer and seller takes the market price as given.
      Eg: Agricultural products (vegetables, fruits, oils), copper, gold etc.
    • Conti…
      Buyers and sellers must accept the price determined by the market. No single seller has market power (the power to influence the market price).
    • Types of cost
      Fixed cost
      Variable cost
      Marginal cost
      Average cost
      Total cost
      E.g. Telephone bill
    • Conti…
    • Relationship between AC & MC
      Diagrammatic representation
      Y
      MC
      Cost/Revenue
      AC
      X
      0
      Q1
      Output/Sales
    • “Demand Faced By A Competitive Firm” versus “Market Demand”
      Price
      Price
      Pm
      QTY (millions)
      QTY (ones)
      Market Demand
      Demand faced by one competitive firm
    • Price Determination
      Y
      Price
      D
      S
      300
      200
      100
      D
      S
      X
      20
      18
      5
      3
      10
      Qty
      0
    • Marginal Revenue & Marginal Cost
      Marginal revenue the change in total revenue that occurs as a result of a 1-unit change in sales..
      Marginal cost is the additional cost from producing one more unit of output.
    • The Revenue of a CompetitiveFirm
      Revenue means total income generated through selling of product.
      Revenue mainly of 3 kinds
      Total Revenue
      Average Revenue
      Marginal Revenue
      Total revenue for a firm is the market price times the quantity sold.
      TR = P  Q
    • Total, Average, and Marginal Revenue for a Competitive Firm
    • Conti…
      Price is fixed of the product in perfect competition.
      So, Marginal revenue, average Revenue and price will be same for competitive firm, that can be represented by straight line horizontal curve.
      Y
      Price
      P= AR= MR
      P
      X
      0
      Qty
    • Profit Maximization & competitive firm’s supply curve
      The goal of a competitive firm is to maximize profit.
      This means that the firm wants to produce the quantity that maximizes the difference between total revenue and total cost.
      P = TR - TC
    • Conti…
    • The firm maximizes
      profit by producing
      the quantity at which
      MC
      marginal cost equals
      marginal revenue.
      MC
      2
      ATC
      =
      =
      =
      =
      P
      MR
      MR
      P
      AR
      MR
      1
      2
      AVC
      MC
      1
      Q
      Q
      Q
      1
      2
      MAX
      Figure 1 Profit Maximization for a Competitive Firm
      Costs
      and
      Revenue
      Quantity
      0
    • Conti…
      When MR > MC,profit is increasing, so must produce more.
      When MR < MC,profit is decreasing, so must produce less.
      When MR = MC, profit is constant, so this is the point where profit is maximized.
    • This section of the
      firm’s MC curve is
      also the firm’s supply
      curve.
      MC
      P
      2
      ATC
      P
      1
      AVC
      Q
      Q
      1
      2
      Figure 2 Marginal Cost as the Competitive Firm’s Supply Curve
      Price
      Quantity
      0
    • Firm’s short-run decision to shut down
      Shut-down
      • It’s a decision not to produce anything during a specific period of time because of current market condition.
      • Have to pay sunk cost, that can not be ignored.
      Exit from market
      • It’s a long run decision to leave the market permanently.
      • Not have to pay any kind of cost at all (fixed/variable)
    • Conti…
      Firm shuts down if the revenue that it would get from production, less than its variable cost of production.
      Shut down if TR < VC
      Shut downif TR/Q < VC/Q
      Shut down if P < AVC
      Firm will lose money in shut down (paying FC) but it would lose more money staying open.
    • MC
      If P > ATC, the firm will continue to produce at a profit.
      Firm

      s short-run
      supply curve
      ATC
      If P > AVC, firm will continue to produce in the short run.
      AVC
      Firm
      shuts
      down if
      P
      AVC
      <
      Figure 3 The Competitive Firm’s Short Run Supply Curve
      Costs
      Quantity
      0
    • The Firm’s Long-Run Decision to Exit or Enter a Market
      In the long run, the firm exits if the revenue it would get from producing is less than its total cost. Equivalently, firm exits (enters) if the profit is negative (positive).
      Exit if TR < TC
      if TR/Q < TC/Q
      if P < ATC
    • Conti…
      A firm enters the market if profit is positive.
      Enter if TR > TC
      if TR/Q > TC/Q
      if P > ATC
    • MC = long-run S
      Firm

      s long-run
      supply curve
      Firm
      enters if
      ATC
      P > ATC
      Firm
      exits if
      P < ATC
      Figure 4 The Competitive Firm’s Long-Run Supply Curve
      Costs
      Quantity
      0
      Copyright © 2004 South-Western
    • Measuring profit in competitive firm
      Profit can be of three kind,
      Supernormal profit
      AR > AC
      Normal profit
      AR = AC
      Sub-normal profit (Loss)
      AR < AC
    • ATC
      MC
      Profit
      P
      ATC
      P
      =
      AR
      =
      MR
      Q
      Figure 5 Profit as the Area between Price and Average Total Cost
      (a) A Firm with Profits
      Price
      Quantity
      0
      (profit-maximizing quantity)
    • ATC
      MC
      P
      P
      =
      AR
      =
      MR
      Figure 5 Profit as the Area between Price and Average Total Cost
      (a) A Firm with Profits
      Price
      ATC =
      Q
      Quantity
      0
      (profit-maximizing quantity)
    • ATC
      MC
      ATC
      P
      P
      =
      AR
      =
      MR
      Loss
      Q
      Figure 5 Profit as the Area between Price and Average Total Cost
      (b) A Firm with Losses
      Price
      Quantity
      0
      (loss-minimizing quantity)
    • Supply curve in a competitive market
      Market supply equals the sum of the quantities supplied by the individual firms in the market.
      Market supply curve can be discussed with two cases;
      Examine market with fixed no. of firms
      Examine market in which no. of firms can change due to entry & exit.
    • The Short Run: Market Supply with a Fixed Number of Firms
      For any given price, each firm supplies a quantity of output so that its marginal cost equals price.
      The market supply curve adds up the individual firms’ marginal cost curves.
    • MC
      Supply
      200
      200
      100
      100
      100,000
      200,000
      100
      200
      Figure 6:SR Market Supply with a Fixed Number of Firms
      (a) Individual Firm Supply
      (b) Short Run Market Supply
      Price
      Price
      SR
      Quantity (firm)
      Quantity (market)
      0
      0
    • The Long Run: Market Supply with Entry and Exit
      If in market, suppose everyone has access to same technology for producing the good & access to same markets to buy the input into production.
      In such market entry & exit depend on incentives facing the owners of existing firms & entrepreneurs who could start new firms.
    • Conti…
      Entry
      Exit
      Existing firms earning profit.
      New entry expand no. of firm in market.
      Expanded no. of firm lead to increase quantity of goods supplied.
      More supply lead to down in price & profits.
      Firm in existing market occurring lose.
      Exit of firm reduce the no. of firm in market.
      Reduced market decreased the quantity of good supplied.
      Less supply lead to drive up price & profits.
    • MC
      ATC
      P
      = minimum
      Supply
      ATC
      Figure 7 Market Supply with Entry and Exit
      (a) Firm

      s Zero-Profit Condition
      (b) Long Run Market Supply
      Price
      Price
      Quantity (market)
      Quantity (firm)
      0
      0
    • Exercise: A Shift in Demand and Short Run & Long Run Consequences
      An increase in demand raises price and quantity in the short run.
      Firms earn profits because price now exceeds average total cost.
    • MC
      ATC
      S
      Short-run supply,
      1
      A
      Long-run
      P
      P
      1
      1
      supply
      D
      Demand,
      1
      Q
      1
      Figure 8 An Increase in Demand in the Short Run and Long Run
      (a) Initial Condition
      Market
      Firm
      Price
      Price
      Quantity (firm)
      Quantity (market)
      0
      0
    • Profit
      ATC
      S
      MC
      1
      B
      P
      P
      2
      2
      A
      P
      1
      D
      2
      D
      1
      Q
      Q
      2
      1
      Figure 8 An Increase in Demand in the Short Run and Long Run
      (b) Short-Run Response
      Market
      Firm
      Price
      Price
      Long-run
      P
      1
      supply
      Quantity (firm)
      Quantity (market)
      0
      0
    • S
      2
      C
      D
      2
      Q
      3
      Figure 8 An Increase in Demand in the Short Run and Long Run
      (c) Long-Run Response
      Market
      Firm
      Price
      Price
      S
      MC
      1
      ATC
      B
      P
      2
      A
      P
      Long-run
      P
      1
      1
      supply
      D
      1
      Quantity (firm)
      0
      Q
      Q
      Quantity (market)
      0
      2
      1
    • Summary
      Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces.
      The price of the good equals both the firm’s average revenue and its marginal revenue.
    • Summary
      To maximize profit, a firm chooses the quantity of output such that marginal revenue equals marginal cost.
      This is also the quantity at which price equals marginal cost.
      Therefore, the firm’s marginal cost curve is its supply curve.
    • Thanking you...