Competitive Markets (By Ian and Shirley)


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Competitive Markets (By Ian and Shirley)

  1. 1. Firms in Perfect Competition<br />A Simplified Market<br />Mankiw Chapter 14<br />
  2. 2. Basic Characteristics <br />There are many buyers and many sellers in the market.<br />The goods offered by the various sellers are largely the same. <br />Firms can freely enter and exit the market.<br />Definition: a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. <br />
  3. 3. Competitive Firm<br />The Competitive Firm has an internal supply curve (MC), to determine what quantity to produce at a specific price.<br />The supply and demand of the overall market determine the price.<br />
  4. 4. Competitive Market<br />+<br />+<br />+<br />+<br />=<br />All of the individual firms’ supply curves add to form the Market Supply<br />The Market Demand is determined by consumers.<br />
  5. 5. Firm Supply & Demand<br />Within the firm, the MC curve acts as supply and MR acts as demand.<br />We can get the MR curve from MR = AR = P<br />MR = (∆ Q x P)/∆ Q = P<br />AR = (Q x P)/Q = P <br />
  6. 6. Profit Maximization (Graphically)<br />Profit Max<br />Each firm reflects the competitive market it is part of:<br />Focuses on MC (firm supply) and MR (firm demand)<br />Profit Max occurs at MR = MC; “equilibrium point”<br />At this point, the cost of an additional item exceeds the revenue for producing it.<br />Firm Demand (MR) is perfectly inelastic. <br />
  7. 7. Finding Profit (Graphically)<br />Profit Max<br />Total Profit<br />Total Profit = Total Revenue – Total Costs<br />Total Costs = ATC x Q<br />Total Revenue = Price x Q<br />Total Profit = (P – ATC) x Q<br />
  8. 8. Finding Profit (Table)<br />
  9. 9. Long Run v. Short Run<br />Short Run – Firms make decisions at the current time.<br />Variable Costs can be changed. (ie. more staff, more field hands, using more energy for machinery) <br />Fixed Costs are fixed. (ie. planting more seeds, factory building rent)<br />Long Run – Firms make decisions over time.<br />Variable Costs are still variable.<br />Fixed Costs can also change. (ie. rent a 2nd factory building) <br />
  10. 10. The Decision to Shut Down or Exit<br />Shut Down – Closing down for the day.<br />Occurs in the short run.<br />When a firm determines that it cannot cover its variable costs, it decides to not ‘produce’ until conditions change.<br />Even if a firm is not making a profit (P is below the ATC), it can defer the fixed costs.<br />However, if it cannot cover the variable costs, the total deficit is greater when producing.<br />
  11. 11. The Decision to Shut Down or Exit<br />Exit – Leaving the market for and indefinite time. <br />Occurs in the long run.<br />When a firm takes losses in the long run, it decides to leave the market – no incentive to stay.<br />This results in other firms taking less losses – 0 long run profit. <br />
  12. 12. Long Run Profit<br />Because firms can enter and exit, they will enter until the total market profit is 0.<br />If firms are making a profit, other firms will also want to make profit; however, this will shift supply right and lower price.<br />If firms have a consistent loss, some will leave the market until all other firms make 0 profit. <br />
  13. 13. Example<br />
  14. 14. Questions? Comments?<br />Thanks for listening!<br />