Bec doms ppt on perfect competition

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Bec doms ppt on perfect competition

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Bec doms ppt on perfect competition

  1. 1. Perfect Competition <ul><li>What is it? </li></ul><ul><li>Firm behavior </li></ul><ul><li>Short run </li></ul><ul><li>Long run </li></ul>
  2. 2. Perfect Competition <ul><li>many firms, many buyers </li></ul><ul><li>identical product </li></ul><ul><li>easy entry/exit for the market </li></ul><ul><li>prices known </li></ul><ul><li>existing firms have no advantage </li></ul>
  3. 3. examples <ul><li>wheat farming </li></ul><ul><li>dry cleaning </li></ul><ul><li>paper cups </li></ul>
  4. 4. Firm Behavior <ul><li>maximize profits </li></ul><ul><li>TR > TC </li></ul><ul><ul><li>economic profits </li></ul></ul><ul><li>TR = TC </li></ul><ul><ul><li>normal profits </li></ul></ul>
  5. 5. Firm is price taker <ul><li>cannot influence price </li></ul><ul><ul><li>take price as given, choose Q </li></ul></ul><ul><li>firm demand is perfectly elastic </li></ul><ul><ul><li>horizontal line </li></ul></ul><ul><li>MR = P </li></ul><ul><ul><li>firm sells all it wants at price, P </li></ul></ul>
  6. 6. Profit maximizing <ul><li>firm chooses Q to max profits </li></ul><ul><ul><li>where TR - TC is largest </li></ul></ul><ul><ul><li>-- where MR = MC </li></ul></ul><ul><li>why MR = MC? </li></ul><ul><ul><li>MR > MC </li></ul></ul><ul><ul><li>-- output adding to profit </li></ul></ul><ul><ul><li>MR < MC </li></ul></ul><ul><ul><li>-- output taking away from profit </li></ul></ul>
  7. 7. Market for syrup (all firms) P Q (cans/day) D S $8 100
  8. 8. Firm’s demand, cost curve $8 D = MR = P P Q (cans/day) MC 10
  9. 9. <ul><li>firm is price taker </li></ul><ul><li>what if price too low to earn profit? </li></ul><ul><ul><li>economic loss </li></ul></ul><ul><ul><li>will firm exit? </li></ul></ul>
  10. 10. costs & exit <ul><li>firm will stay, in SR, if </li></ul><ul><ul><li>P > AVC </li></ul></ul><ul><li>why? </li></ul><ul><ul><li>if firm exits, loses TFC </li></ul></ul><ul><ul><li>if P = AVC </li></ul></ul><ul><ul><li>-- loss from staying </li></ul></ul><ul><ul><li>= loss from exit </li></ul></ul>
  11. 11. SR equilibrium <ul><li>two cases </li></ul><ul><ul><li>economic profit </li></ul></ul><ul><ul><li>economic loss </li></ul></ul>
  12. 12. Case 1: economic profit <ul><li>P = $8, Q = 10 </li></ul><ul><li>ATC = $5 </li></ul><ul><li>profit = ($8)(10) - ($5)(10) = $30 </li></ul>
  13. 13. $8 D = MR = P P Q (cans/day) MC 10 ATC $5 economic profit
  14. 14. case 2: economic loss <ul><li>P = $3, Q = 7 </li></ul><ul><li>ATC = $5 </li></ul><ul><li>profit = ($3)(7) - ($5)(7) = - $14 </li></ul>
  15. 15. $3 D = MR = P P Q (cans/day) MC 7 ATC $5 economic loss
  16. 16. 12.3 LR Equilibrium <ul><li>entry & exit of firms </li></ul><ul><li>firms earn normal profit </li></ul><ul><ul><li>economic profit will be zero </li></ul></ul>
  17. 17. why zero economic profit? <ul><li>if economic profit > zero </li></ul><ul><ul><li>firms enter (S shifts right) </li></ul></ul><ul><ul><li>price falls </li></ul></ul><ul><ul><li>profit falls to zero </li></ul></ul>
  18. 18. market for syrup P Q (cans/day) D S $8 100 S’ $5 120
  19. 19. Syrup firm D = MR = P P Q (cans/day) MC ATC $5 zero economic profit
  20. 20. <ul><li>if economic profit < zero </li></ul><ul><ul><li>firms exit (S shifts left) </li></ul></ul><ul><ul><li>price rises </li></ul></ul><ul><ul><li>profit rises to zero </li></ul></ul>
  21. 21. market for syrup P Q (cans/day) D S $5 120 $3 140 S’’
  22. 22. $3 D = MR = P P Q (cans/day) MC 7 ATC $5 economic loss
  23. 23. Syrup firm D = MR = P P Q (cans/day) MC ATC $5 zero economic profit
  24. 24. Shifts in market demand <ul><li>change price in SR </li></ul><ul><ul><li>profits or losses </li></ul></ul><ul><li>in LR affect exit/entry </li></ul><ul><ul><li>return to zero economic profit </li></ul></ul>
  25. 25. Summary <ul><li>price takers </li></ul><ul><li>MR = MC determines equilibrium Q </li></ul><ul><ul><li>SR: economic profit or loss </li></ul></ul><ul><ul><li>LR: economic profit is zero due </li></ul></ul><ul><ul><li>to entry/exit </li></ul></ul>

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