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1. A perfectly competitive market has six key characteristics: many small firms, identical products, free entry and exit, perfect information, price-taking behavior on the part of buyers and sellers. 2. For a firm in perfect competition, marginal revenue equals price and the profit-maximizing level of output occurs where marginal revenue equals marginal cost. 3. In the long run, firms will enter or exit the market until economic profits are driven down to zero and the industry reaches long-run competitive equilibrium.
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A competitive market has many small firms that produce identical goods, with free entry and exit. Each firm is a price taker and maximizes profits by producing where marginal revenue equals marginal cost. The competitive firm's supply curve is its marginal cost curve above average variable cost in the short run and above average total cost in the long run. Market supply is the sum of individual firm supplies. In the long run, entry and exit drive the market to equilibrium with price equal to minimum average total cost and zero profits.
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The document discusses market structures and perfect competition. It describes the key features of perfect competition as having many small businesses, standardized products, free entry and exit, and firms that are price takers. Under perfect competition, firms maximize profits by producing at the quantity where marginal revenue equals marginal cost. In the long run, perfectly competitive markets achieve equilibrium when price equals minimum average cost and all firms earn zero economic profits. The benefits of perfect competition are that it results in minimum-cost pricing and marginal-cost pricing, which benefits consumers.
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This document discusses the characteristics and behavior of firms in perfectly competitive markets. It provides examples and diagrams to illustrate key concepts such as:
- Firms are price-takers and will shut down production in the short-run if price falls below average variable cost.
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- A firm will produce the quantity that maximizes its profit, where marginal revenue equals marginal cost.
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In a perfectly competitive market:
- Many buyers and sellers exist
- Firms are price takers and the actions of any single firm do not impact the market price
- In the long run, firms will enter or exit the market until price equals minimum average total cost and economic profit is zero.
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A competitive market has many small firms that produce identical goods, with free entry and exit. Each firm is a price taker and maximizes profits by producing where marginal revenue equals marginal cost. The competitive firm's supply curve is its marginal cost curve above average variable cost in the short run and above average total cost in the long run. Market supply is the sum of individual firm supplies. In the long run, entry and exit drive the market to equilibrium with price equal to minimum average total cost and zero profits.
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This document summarizes key concepts about firms in competitive markets from Chapter 14 of Mankiw et al.'s Principles of Microeconomics. It discusses that a competitive market has many buyers and sellers of identical goods, where each takes prices as given. Firms aim to maximize profits by producing where marginal revenue equals marginal cost. A firm will shut down temporarily if price is below average variable cost and exit the market completely if price is below average total cost in the long run. The portion of the marginal cost curve above average variable cost represents a competitive firm's short-run supply curve.
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The document discusses how a firm can maximize its profits by producing at the output level where marginal revenue equals marginal cost. It explains that a firm is making normal profits when average revenue equals average cost. The document also outlines how economies of scale can lower average costs and allow a firm to increase profits by reducing prices and selling at a higher output level.
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The document provides an overview of market structures and firm behavior in microeconomics. It defines four main market models - pure competition, pure monopoly, monopolistic competition, and oligopoly. For each model, it discusses characteristics like number of firms, entry barriers, and pricing behavior. The document also covers concepts like profit maximization, costs of production, efficiency under perfect competition, and strategic pricing in oligopolistic markets.
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The document discusses market structures and perfect competition. It describes the key features of perfect competition as having many small businesses, standardized products, free entry and exit, and firms that are price takers. Under perfect competition, firms maximize profits by producing at the quantity where marginal revenue equals marginal cost. In the long run, perfectly competitive markets achieve equilibrium when price equals minimum average cost and all firms earn zero economic profits. The benefits of perfect competition are that it results in minimum-cost pricing and marginal-cost pricing, which benefits consumers.
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This document provides an overview of theories related to firm behavior, including:
- Apple has been very successful while Japanese Airlines (JAL) recently declared bankruptcy with large debts.
- Economists can provide advice to firms on price, output, profit, and costs to maximize profits and efficiency.
- Theories of the firm aim to understand optimal pricing, production, and profits based on costs, revenues, and market structure.
Profit Maximisation Notes - A-level & IB Economics
Download these notes and other resources at https://WeAreQurious.com/Economics
Teaching, learning and revision notes for Profit Maximisation in A-Level Economics and IB Economics for all exam boards (Edexcel, AQA, OCR, Eduqas, WJEC).
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The document discusses the characteristics and behavior of firms in a perfectly competitive market. It defines a competitive market as having many small firms and buyers, homogeneous products, and free entry and exit. In the short run, individual firms maximize profits by producing where marginal revenue equals marginal cost. In the long run, firms enter and exit the market until price equals minimum average total cost and profits are zero. The market supply curve is determined by the marginal cost curves of individual firms.
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The document summarizes key concepts relating to firms operating in competitive markets including:
- The four basic market types are perfect competition, monopolistic competition, oligopoly, and monopoly.
- For a competitive firm, marginal revenue equals price since each additional unit sold does not impact the market price.
- A competitive firm will produce the quantity where marginal revenue equals marginal cost to maximize profits.
- In the short-run, a competitive firm will shut down if price falls below average variable cost. In the long-run, the firm will exit the market if price falls below average total cost.
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This chapter discusses perfect competition and profit maximization in competitive markets. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where marginal revenue equals marginal cost.
2. In the short run, firms will shut down if price falls below average variable cost or operate at a loss if price is between average variable and average total cost. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium price and quantity in both the
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The document discusses the theory of the firm and the cost of production. It defines the production function as the relationship between inputs and outputs. It classifies inputs as land, labor, and capital. It then discusses the mathematical representation of the production function and analyzes production in the short run and long run. It also discusses concepts like marginal product, diminishing marginal returns, total cost, average cost, marginal cost, revenue, and profit.
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1) The document discusses concepts related to costs, profits, and output decisions for firms in the long-run and short-run. It provides an example of costs and profits for a car wash business.
2) Firms aim to maximize profits in the short-run by producing where marginal revenue equals marginal cost. In the long-run, firms will enter or exit an industry in response to economic profits or losses.
3) Economies and diseconomies of scale can impact a firm's long-run average costs as production scales change. The long-run average cost curve shows the different scales a firm can operate at.
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The document discusses different types of costs that businesses incur: fixed costs, variable costs, direct costs, and indirect costs. It provides examples of each:
- Fixed costs do not change with output, like rent costs of £12,000 per year.
- Variable costs do change with output, like stock which is £200 per month.
- Direct costs are directly linked to production, like wages of factory workers.
- Indirect costs affect the whole company, like marketing costs for a car company.
The document also presents a case study of costs for Mr. and Mrs. Cartwright's market stall and asks questions about categorizing the costs and calculating profits.
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The document discusses perfect competition and perfectly competitive markets. It defines the key assumptions of perfect competition as firms being price takers, products being homogeneous, and free entry and exit in the industry. It explains that in the short run, competitive firms will operate at a loss, earn normal profits, or supernormal profits depending on whether price is below average cost, equal to average cost, or above average cost. In the long run, entry and exit of firms will drive prices down to equal minimum long run average cost, resulting in zero economic profits.
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1) The document discusses the behavior of firms in perfectly competitive markets. It examines how a competitive firm determines the profit-maximizing quantity to produce based on the relationship between marginal revenue, average total cost, and marginal cost.
2) In the short run, a competitive firm will shut down production if the market price falls below average variable cost. In the long run, a firm will exit the market if price falls below average total cost.
3) The market supply curve is determined by summing the individual supply curves of all firms. In the short run, the market supply curve is the portion of the marginal cost curve above average variable cost. In the long run, it is horizontal at the price equal to minimum
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Perfect competition arises when there are many small firms producing identical goods, free entry and exit into the industry, and buyers and sellers have perfect information. In the short run, individual firms act as price takers and seek to maximize profits by producing where marginal revenue equals marginal cost. In the long run, only firms earning normal profits will remain in the industry as firms enter with economic profits and exit with economic losses until equilibrium is reached. This equilibrium maximizes total surplus and ensures productive efficiency.
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1) A perfectly competitive firm is a price taker and will produce the quantity where marginal revenue equals marginal cost to maximize profits.
2) In the short run, if price is below average variable cost the firm will shut down, and if below average total cost the firm will exit the market in the long run.
3) The market supply curve is determined by the marginal cost curves of all firms, and will be horizontal at the minimum of average total cost in the long run equilibrium with free entry and exit.
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This document provides an overview of theories related to firm behavior, including:
- Apple has been very successful while Japanese Airlines (JAL) recently declared bankruptcy with large debts.
- Economists can provide advice to firms on price, output, profit, and costs to maximize profits and efficiency.
- Theories of the firm aim to understand optimal pricing, production, and profits based on costs, revenues, and market structure.
Profit Maximisation Notes - A-level & IB Economics
Download these notes and other resources at https://WeAreQurious.com/Economics
Teaching, learning and revision notes for Profit Maximisation in A-Level Economics and IB Economics for all exam boards (Edexcel, AQA, OCR, Eduqas, WJEC).
Chapter 8 perfect competitio-micro
Perfect competition is characterized by many small firms, homogeneous products, perfect information and free entry and exit. Under perfect competition in the short-run, firms are price takers and maximize profits by producing where marginal revenue equals marginal cost. In long-run equilibrium, firms earn zero economic profit as entry and exit cause supply to equal minimum average total cost. Perfect competition leads to productive and allocative efficiency.
Exchange ratio and synergy
Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. Synergy is often a driving force behind mergers and acquisitions and can result in increased revenues or lower expenses. The exchange ratio measures the number of shares the acquiring company issues for each individual share of the target firm in M&A deals involving stock. There are several methods for calculating the exchange ratio, including using earnings per share, market price per share, price-earnings ratio, and net asset value. The maximum and minimum exchange ratios are calculated based on maintaining pre-merger EPS and MPS levels after adjusting for synergies.
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The document discusses the characteristics and behavior of firms in a perfectly competitive market. It defines a competitive market as having many small firms and buyers, homogeneous products, and free entry and exit. In the short run, individual firms maximize profits by producing where marginal revenue equals marginal cost. In the long run, firms enter and exit the market until price equals minimum average total cost and profits are zero. The market supply curve is determined by the marginal cost curves of individual firms.
Pcf (2) 4_mergers_and_acquisitions[2] ms
Mergers and acquisitions can create value through synergies like economies of scale or market power consolidation. However, research shows over 60% of deals fail to benefit acquiring shareholders. Motives include economic gains but also managerial factors like ego. Successful deals require financing, with cash or stock offers common. Regulators review large deals for competition impacts. Defensive tactics can rebuff undesired bids. Overall, mergers are risky investments that often underdeliver on promised value creation.
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The document summarizes key concepts relating to firms operating in competitive markets including:
- The four basic market types are perfect competition, monopolistic competition, oligopoly, and monopoly.
- For a competitive firm, marginal revenue equals price since each additional unit sold does not impact the market price.
- A competitive firm will produce the quantity where marginal revenue equals marginal cost to maximize profits.
- In the short-run, a competitive firm will shut down if price falls below average variable cost. In the long-run, the firm will exit the market if price falls below average total cost.
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Explains about the transfer pricing, how its been used by MNC's to avoid taxes and get benefited more.
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This chapter discusses perfect competition and profit maximization in competitive markets. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where marginal revenue equals marginal cost.
2. In the short run, firms will shut down if price falls below average variable cost or operate at a loss if price is between average variable and average total cost. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium price and quantity in both the
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Firms face different costs in the short-run depending on their level of output. Total costs include total fixed costs, which do not vary with output, and total variable costs, which do vary with output. As a firm's output increases, average fixed costs decline due to spreading fixed costs over more units of output. Average variable costs and average total costs initially decline as well, but eventually begin increasing once diminishing returns set in. Marginal cost, the change in total costs from an additional unit of output, also increases once diminishing returns occur. Understanding how costs change with output level and productivity helps firms maximize profits.
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The document discusses the theory of the firm and the cost of production. It defines the production function as the relationship between inputs and outputs. It classifies inputs as land, labor, and capital. It then discusses the mathematical representation of the production function and analyzes production in the short run and long run. It also discusses concepts like marginal product, diminishing marginal returns, total cost, average cost, marginal cost, revenue, and profit.
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1) The document discusses concepts related to costs, profits, and output decisions for firms in the long-run and short-run. It provides an example of costs and profits for a car wash business.
2) Firms aim to maximize profits in the short-run by producing where marginal revenue equals marginal cost. In the long-run, firms will enter or exit an industry in response to economic profits or losses.
3) Economies and diseconomies of scale can impact a firm's long-run average costs as production scales change. The long-run average cost curve shows the different scales a firm can operate at.
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The document discusses different types of costs that businesses incur: fixed costs, variable costs, direct costs, and indirect costs. It provides examples of each:
- Fixed costs do not change with output, like rent costs of £12,000 per year.
- Variable costs do change with output, like stock which is £200 per month.
- Direct costs are directly linked to production, like wages of factory workers.
- Indirect costs affect the whole company, like marketing costs for a car company.
The document also presents a case study of costs for Mr. and Mrs. Cartwright's market stall and asks questions about categorizing the costs and calculating profits.
Leverage
Leverage refers to using fixed costs to increase returns for owners. In finance, leverage allows firms to use fixed-cost funds like debt and preferred shares to increase earnings for equity shareholders. There are three types of leverage: operating, financial, and combined. Operating leverage measures how fixed costs affect operating income with sales changes. Financial leverage measures how interest expenses affect EPS. Combined leverage multiplies operating and financial leverage to measure total leverage.
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The document discusses perfect competition and perfectly competitive markets. It defines the key assumptions of perfect competition as firms being price takers, products being homogeneous, and free entry and exit in the industry. It explains that in the short run, competitive firms will operate at a loss, earn normal profits, or supernormal profits depending on whether price is below average cost, equal to average cost, or above average cost. In the long run, entry and exit of firms will drive prices down to equal minimum long run average cost, resulting in zero economic profits.
Profit and loss BY AJAY PAL
The document discusses profit and loss statements. It explains that a profit and loss statement shows if a company made a profit or loss over a period of time. Revenue is recognized when economic benefits are received. Expenses are deducted from revenue to calculate profit. The document provides an example of a poultry farmer's profit calculation. It shows his expenses of Rs. 2040 and sales of Rs. 2565 from 95 birds, giving a profit of Rs. 525.
Cost volume profit analysis
This document discusses key concepts in cost volume profit (CVP) analysis including:
1) CVP analysis explores the relationship between costs, revenue, volume and their impact on profits. It examines fixed costs, variable costs, semi-variable costs, contribution margin, break-even point, and profit-volume ratio.
2) Fixed costs remain the same for different production levels while variable costs change with output. The margin of safety is the difference between actual and break-even sales.
3) The profit-volume ratio measures the rate of change in profit due to changes in sales volume and can be calculated in different ways. Ratio analysis is used to evaluate liquidity, investment risk and returns, financial leverage, and
Cf Leverage 7 C
Leverage refers to using fixed costs to magnify a firm's profits but also increases risk. Operating leverage is the use of fixed operating costs and impacts how volume affects profits. Financial leverage is the use of debt financing and impacts how changes in operating profits affect earnings per share. Firms must consider the appropriate level of operating and financial leverage to balance higher potential profits with increased risk of losses or bankruptcy.
Financial Statement Analysis & Projections
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Profit Maximisation Notes - A-level & IB Economics
Profit Maximisation Notes - A-level & IB Economics
4 the theory of the firm and the cost of production
4 the theory of the firm and the cost of production
Similar to Chapter 14 pp
microeconomics - chapter 14-presentation.ppt
1) The document discusses the behavior of firms in perfectly competitive markets. It examines how a competitive firm determines the profit-maximizing quantity to produce based on the relationship between marginal revenue, average total cost, and marginal cost.
2) In the short run, a competitive firm will shut down production if the market price falls below average variable cost. In the long run, a firm will exit the market if price falls below average total cost.
3) The market supply curve is determined by summing the individual supply curves of all firms. In the short run, the market supply curve is the portion of the marginal cost curve above average variable cost. In the long run, it is horizontal at the price equal to minimum
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Perfect competition arises when there are many small firms producing identical goods, free entry and exit into the industry, and buyers and sellers have perfect information. In the short run, individual firms act as price takers and seek to maximize profits by producing where marginal revenue equals marginal cost. In the long run, only firms earning normal profits will remain in the industry as firms enter with economic profits and exit with economic losses until equilibrium is reached. This equilibrium maximizes total surplus and ensures productive efficiency.
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1) A perfectly competitive firm is a price taker and will produce the quantity where marginal revenue equals marginal cost to maximize profits.
2) In the short run, if price is below average variable cost the firm will shut down, and if below average total cost the firm will exit the market in the long run.
3) The market supply curve is determined by the marginal cost curves of all firms, and will be horizontal at the minimum of average total cost in the long run equilibrium with free entry and exit.
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1. The document discusses the characteristics and pricing behavior of perfectly competitive markets. It defines perfect competition and describes its key features.
2. Under perfect competition, firms are price takers and equilibrium occurs where price equals marginal cost. In the short run, firms will shut down if price falls below average variable cost.
3. In the long run, firms will enter or exit the market until price equals minimum average cost and normal profits are achieved. Perfect competition leads to allocative and productive efficiency.
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The document discusses the concept of perfect competition in economics. It provides the key characteristics that define a perfectly competitive market including that there are many small firms, no barriers to entry or exit, identical products, and complete information. Firms are price takers and seek to maximize profits by producing where marginal cost equals marginal revenue. In the long run, perfect competition leads to zero economic profits as new firms enter if profits are positive and firms exit if losses occur.
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The document discusses key concepts relating to perfect competition, including:
- Firms are price-takers and face perfectly elastic demand in competitive markets
- Profit maximization occurs where marginal revenue equals marginal cost
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- In the long-run, if profits exist, entry by new firms will increase supply and drive prices down until profits are eliminated
The Model Of Perfect Competition
Perfect competition is an ideal market structure where many small firms produce identical goods, there are no barriers to entry or exit, and both buyers and sellers have perfect information. Under perfect competition in the long run, firms earn zero economic profit and both allocative and productive efficiency are achieved as price equals marginal cost and firms produce at minimum average total cost.
Perfectly competitive market
Perfect competition is an idealized market structure that achieves an efficient allocation of resources.
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The document discusses the characteristics and behavior of firms in a perfectly competitive market. It explains that in the short run, a competitive firm will shut down if price is below average variable cost, while in the long run it will exit the market if price is below average total cost. The firm's marginal cost curve represents its supply curve. The market supply curve is determined by the summation of individual firms' supply. In the long run, free entry and exit will drive profits to zero.
Perfect competition -phpapp01
Perfect competition requires:
- Numerous buyers and sellers who are price takers
- Identical products
- Free entry and exit from the market
- Complete information
Firms maximize profits by producing where marginal cost equals marginal revenue. In perfect competition, marginal revenue equals price for all firms. In the long run, perfect competition leads to an equilibrium with zero economic profits.
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Chapter (14) Firms in Competitive Markets In this ch.docx
Chapter (14)
Firms in Competitive Markets
In this chapter, we will discuss the general characteristics of a perfectly competitive
market, and the operations of a perfectly competitive firm.
In any economy, there exists a number of market structures, these are:
1. Perfectly competitive market.
2. Monopoly
3. Oligopoly
4. Monopolistic competitive market.
In the chapter, we will discuss the perfectly competitive market, whereas the following 3
chapters will introduce to us the other market structures.
One major difference between perfectly competitive market and all other markets is that
all these markets (other than the perfectly competitive market) are considered imperfectly
competitive markets.
What do perfectly and imperfectly competitive markets mean?
We will start first by listing the major characteristics of a perfectly competitive market.
Characteristics of a perfectly competitive market:
1. Many small sellers that no producer can affect the market price of the product.
2. Many small consumers that no consumer can affect the market price of the product.
3. Homogeneous or standard product supplied by all producers.
4. Any firm operating in this market is a price taker, where firms in this market produce
and sell at the given market price.
5. Barriers to entry to this market are very low and even nonexistent. Hence firms can
enter and leave the industry freely.
From the above characteristics, we can conclude the following definition of a perfectly
competitive market:
A perfectly competitive market is a market where any firm has no control on
determining the price of its product. In other words, it is the market forces (that is
forces of DD and SS) that determines the price of perfectly competitive firms’ products,
and the firms operating in this market accept these market ‘prices; hence we call perfectly
competitive firms as price-takers that is taking the price of their products from the market
and having no control on setting or determining the price of their products.
When a firm has no control on setting the price of its product, its DD curve is a
completely horizontal curve.
On the other side, imperfectly competitive market is a market where the operating firms
have some degree of control on setting the price of their products. The degree of control
determines the degree of imperfection existing in this market. Sine an imperfectly
competitive firm controls the price of its product, then its DD curve is a downward-
sloping curve.
In economics, we identify 3 major imperfectly competitive markets:
1. Monopoly
2. Oligopoly
3. Monopolistic Competitive Market
Objectives, Important Decisions: and Operations of a Perfectly Competitive Firm
To understand the operations of a perfectly competitive firm, we need to recall some
algebraic theorems to understand the below analysis.
1. When we have a horizontal function, its first derivative should be ...
Chap5
This chapter discusses perfect competition and profit maximization in perfect competition. It contains the following key points:
1. Under perfect competition, there are many small firms and buyers/sellers, homogeneous products, free entry and exit, and perfect information. Firms are price takers and maximize profits by producing where MR=MC.
2. In the short run, firms will shut down if P<AVC or operate to minimize losses if ATC>P>AVC. In the long run, zero economic profits are achieved through free entry and exit of firms.
3. External changes like shifting demand curves or new technology can impact market equilibrium prices and quantities in the short and long run through adjustments to
Market Perfect Competition_MBA_Parakramesh Jaroli
This document provides an overview of different market structures, with a focus on perfect competition. It defines key concepts related to revenue, costs, and profit maximization for firms in competitive markets. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. Equilibrium occurs where marginal cost equals marginal revenue. The document also discusses long-run equilibrium and how perfect competition leads to allocative efficiency.
Marketstructures
There are 4 main types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information. Under perfect competition, firms are price takers and marginal revenue equals price. In both the short run and long run, firms will produce where marginal cost equals marginal revenue to maximize profits. The perfectly competitive market leads to productive and allocative efficiency.
PROFIT MAXIMISATION using MR, MC and profit maximisation.pptx
The document discusses profit maximization and competitive supply in perfectly competitive markets. It can be summarized as follows:
1. Perfectly competitive markets are characterized by price-taking firms, homogeneous products, and free entry and exit. Firms seek to maximize profits by producing where marginal revenue equals marginal cost.
2. The competitive firm's short-run supply curve slopes upward as higher prices induce firms to increase production. In the long-run, firms adjust all inputs including plant size to minimize average costs and maximize profits.
3. Market supply is the sum of individual firm supplies. It has a kinked shape and is upward sloping in the short-run. In the long-run, firms enter
Perfect competition
1. The document discusses the concept of perfect competition, which is an ideal market structure with no barriers to entry, homogeneous products, perfect information, and price-taking firms and consumers.
2. Under perfect competition, firms seek to maximize profits by producing at the level where marginal revenue equals marginal cost, and marginal cost is rising. In the long run, no firms earn abnormal profits as free entry and exit drives prices down to minimum average cost.
3. The perfect competition model serves as a benchmark for analyzing market imperfections, as it achieves an efficient allocation of resources where price equals minimum average cost and marginal cost equals marginal benefit to consumers.
Similar to Chapter 14 pp (20)
Chapter (14) Firms in Competitive Markets In this ch.docx
Chapter (14) Firms in Competitive Markets In this ch.docx
PROFIT MAXIMISATION using MR, MC and profit maximisation.pptx
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Chapter 14 pp
- 1. Perfect Competition 14 Perfect Competition There’s no resting place for an enterprise in a competitive economy. — Alfred P. Sloan CHAPTER 14 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
- 2. Perfect Competition 14 A Perfectly Competitive Market • For a market to be perfectly competitive, six conditions must be met: 1. Both buyers and sellers are price takers – a price taker is a firm or individual who takes the price determined by market supply and demand as given 2. The number of firms is large – any one firm’s output compared to the market output is imperceptible and what one firm does has no influence on other firms • A perfectly competitive market is a market in which economic forces operate unimpeded 14-2
- 3. Perfect Competition 14 A Perfectly Competitive Market 3. There are no barriers to entry – barriers to entry are social, political, or economic impediments that prevent firms from entering a market 4. Firms’ products are identical – this requirement means that each firm’s output is indistinguishable from any other firm’s output 5. There is complete information – all consumers know all about the market such as prices, products, and available technology 6. Selling firms are profit-maximizing entrepreneurial firms – firms must seek maximum profit and only profit 14-3
- 4. Perfect Competition 14 Demand Curves for the Firm and the Industry P Q Market demand is downward sloping Market Supply Firm demand is perfectly elastic (horizontal) P0 Market Demand P Q P0 Firm Demand P = D = MR Q1 Q2 Q3 14-4
- 5. Perfect Competition 14 Profit Maximizing Level of Output • Marginal revenue (MR) is the change in total revenue associated with a change in quantity • A firm maximizes profit when marginal revenue equals marginal cost • The goal of the firm is to maximize profits, the difference between total revenue and total cost • Marginal cost (MC) is the change in total cost associated with a change in quantity 14-5
- 6. Perfect Competition 14 Profit Maximizing Level of Output If MR < MC, • a firm can increase profit by decreasing its output If MR > MC, • a firm can increase profit by increasing output • The profit-maximizing condition of a competitive firm is: MR = MC • For a competitive firm, MR = P • A firm maximizes total profit, not profit per unit 14-6
- 7. Perfect Competition 14 Marginal Cost, Marginal Revenue, and Price Table Price = MR ($) Q Marginal Cost ($) 35 0 28 20 16 14 12 17 22 30 40 54 35 1 35 2 35 3 35 4 35 5 35 6 35 7 35 8 35 9 35 10 If MC < P, increase production Profit maximizing quantity is where MC = P If MC > P, decrease production The profit-maximizing condition of a competitive firm is: MC = MR = P 14-7
- 8. Perfect Competition 14 Marginal Cost, Marginal Revenue, and Price Graph P Q Marginal Cost $35 P = D = MR MC < P, increase output to increase total profit MC = P at 8 units, total profit is maximized MC > P, decrease output to increase total profit MC = P 14-8
- 9. Perfect Competition 14 Total Revenue and Total Cost Table Q Total Revenue ($) Total Cost ($) Total Profit ($) 0 0 40 -40 1 35 68 -33 2 70 88 -18 3 105 104 1 4 140 118 22 5 175 130 45 6 210 147 63 7 245 169 76 8 280 199 81 9 315 239 76 10 350 293 57 Total profit is maximized at 8 units of output 14-9
- 10. Perfect Competition 14 Determining Profits Graphically: A Firm with Profit AVC MC Q P ATC Find output where MC = MR, this is the profit maximizing Q P = D = MR MC = MR Qprofit max Find profit per unit where the profit max Q intersects ATC ATC at Qprofit max P ATC Profits Since P>ATC at the profit maximizing quantity, this firm is earning profits 14-10
- 11. Perfect Competition 14 Determining Profits Graphically: The Shutdown Decision AVC MC Q P ATC Qprofit max PShut down P = D = MR • The shutdown point is the point below which the firm will be better off if it shuts down than it will if it stays in business • If P>min of AVC, then the firm will still produce, but earn a loss • If P<min of AVC, the firm will shut down • If a firm shuts down, it still has to pay its fixed costs 14-11
- 12. Perfect Competition 14 ATC Profits Short-Run Market Supply and Demand Graph P Q Market Supply P Market Demand P Q P P = D = MR MC ATC Qprofit max Market Firm 14-12
- 13. Perfect Competition 14 Long-Run Competitive Equilibrium • Profits create incentives for new firms to enter, market supply will increase, and the price will fall until zero profits are made • At long run equilibrium, economic profits are zero • The existence of losses will cause firms to leave the industry, market supply will decrease, and the price will increase until losses are zero 14-13
- 14. Perfect Competition 14 Long-Run Competitive Equilibrium • Normal profit is the amount the owners would have received in their next best alternative • Zero profit does not mean that the entrepreneur does not get anything for his efforts • Economic profits are profits above normal profits 14-14
- 15. Perfect Competition 14 SR Profits Market Response to an Increase in Demand Graph P Q S0(SR) P0 D0 P Q P0 MC ATC Q0,2 Market Firm S1(SR) D1 P1 1 P1 1 1 Q1 2 2 2 Q0 Q1 Q2 1 1 2 2 S(LR) 14-15