# Production, cost, profit and perfect competition

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Production, cost, profit and perfect competition
Microeconomics Unit 2 Production, cost, profit and perfect competition

Average Product = Topic 1: PRODUCTION
Total Product (TP)- total output or quantity produced Marginal Product (MP)- the additional output generated by additional inputs (workers). = change in total product Average Product (AP)- the output per unit of input Average Product = Total Product # of workers 2

Total Product(TP) PIZZAS
calculate MP and AP # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) 1 10 2 25 3 45 4 60 5 70 6 75 7 8 3

Total Product(TP) PIZZAS
calculate MP and AP # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 3 45 20 4 60 5 70 6 75 7 8 -5 4

Total Product(TP) PIZZAS
calculate MP and AP # of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 12.5 3 45 20 4 60 5 70 14 6 75 7 10.71 8 -5 8.75 5

Stages of Production Increasing returns: workers produce more additional products Happens because of SPECIALIZATION

Stages of Production Diminishing returns: workers produce less ADDITIONAL products Happens because more workers are using the same fixed resources (not enough fixed resources to go around)

Diminishing Marginal Returns Too many cooks in the kitchen!

Stages of Production Negative returns: workers produce less total product Happens because workers get in each others way

Identify the three stages of returns Total Product(TP) PIZZAS
# of Workers (Input) Total Product(TP) PIZZAS Marginal Product(MP) Average Product(AP) - 1 10 2 25 15 12.5 3 45 20 4 60 5 70 14 6 75 7 10.71 8 -5 8.75 10

Graphing Production 11

Stage I: increasing marginal returns Marginal and Average Product
Due to Specialization Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 12 Marginal Product

Stage II: decreasing marginal returns
Due to more workers using same fixed resources Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 13 Marginal Product

Stage III: Negative Marginal Returns Marginal and Average Product
Total Product Total Product Quantity of Labor Marginal and Average Product Average Product Quantity of Labor 14 Marginal Product

Topic 2: short run costs vs. long run costs

Short Run: fixed plant Time period in which some resources remain fixed; it is too brief for a firm to change its plant capacity

Long Run: Variable plant
Time frame in which all resources can be varied; period of time is long enough to change plant size

Topic 3: Short Run Costs of Production

workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost Average total cost 70 --- 3.29 5 ---- 8.29 92 1.64 138 1.39 184 1.24 230 1.21 276 1.53 322 2.00 368 3.54

Complete MP in chart in notes

Increasing and decreasing returns????
workers TP Marginal product 14 28 33 37 38 30 23 13 Increasing and decreasing returns????

EXPLICIT VS. IMPLICIT COSTS
Explicit costs = out of pocket expenses Accountants only look at this Implicit costs = opportunity costs (foregone wages, depreciation ect) Economists consider explicit AND implicit!

Overall costs: What is the overall cost of producing??
Must look at TOTALS Fixed Costs: (FC) Costs that DON’T change Variable Costs: (VC) Costs that DO change Total Costs: FC + VC

workers TP Marginal product Fixed cost 14 70 38 33 37 30 23 13

What happens to FC as more products are produced???
workers TP Marginal product Fixed cost 14 70 28 33 37 38 30 23 13 What happens to FC as more products are produced???

What happens to VC as more products are produced?
workers TP Marginal product Fixed cost Variable cost Total cost 14 70 38 92 33 138 37 184 230 30 276 23 322 13 368 What happens to VC as more products are produced?

What happens to TC as more products are produced???
workers TP Marginal product Fixed cost Variable cost Total cost 14 70 46 116 28 92 162 33 138 208 37 184 254 38 230 300 30 276 346 23 322 392 13 368 438 What happens to TC as more products are produced???

Cost Graphs Total Costs

1. Fixed cost will always be the same
2. VC will always slope up 3. Total cost will always slope up * TC always > VC *Distance between TC and VC = FC

Additional costs of making ONE more product .
Marginal Cost: Additional costs of making ONE more product . 30

What happens to MC as more products are produced???
workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost 14 70 46 116 3.29 28 92 162 1.64 33 138 208 1.39 37 184 254 1.24 38 230 300 1.21 30 276 346 1.53 23 322 392 2.00 13 368 438 3.54 What happens to MC as more products are produced???

How much does each product cost to make? Use AVERAGES
Average Fixed Cost (AFC): fixed cost PER PRODUCT AFC = FC/TP

workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost 14 70 46 116 3.29 5 28 92 162 1.64 33 138 208 1.39 37 184 254 1.24 38 230 300 1.21 30 276 346 1.53 23 322 392 2.00 13 368 438 3.54

What happens to AFC as more products are produced???
workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost 14 70 46 116 3.29 5 28 92 162 1.64 1.67 33 138 208 1.39 .93 37 184 254 1.24 .63 38 230 300 1.21 .47 30 276 346 1.53 .39 23 322 392 2.00 .34 13 368 438 3.54 .32 What happens to AFC as more products are produced???

Average Variable cost (AVC): variable cost PER PRODUCT
AVC = VC/TP

workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost 14 70 46 116 3.29 5 28 92 162 1.64 1.67 33 138 208 1.39 .93 37 184 254 1.24 .63 38 230 300 1.21 .47 30 276 346 1.53 .39 23 322 392 2.00 .34 13 368 438 3.54 .32

What happens to AVC as more products are produced???
workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost 14 70 46 116 3.29 5 28 92 162 1.64 1.67 2.19 33 138 208 1.39 .93 1.84 37 184 254 1.24 .63 38 230 300 1.21 .47 1.53 30 276 346 .39 23 322 392 2.00 .34 1.59 13 368 438 3.54 .32 1.70 What happens to AVC as more products are produced???

Average total cost (ATC): TOTAL cost PER PRODUCT
ATC = TC/TP or ACT = AFC + AVC

workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost Average total cost 14 70 46 116 3.29 5 8.29 28 92 162 1.64 1.67 2.19 33 138 208 1.39 .93 1.84 37 184 254 1.24 .63 38 230 300 1.21 .47 1.53 30 276 346 .39 23 322 392 2.00 .34 1.59 13 368 438 3.54 .32 1.70

What happen to ATC as more products are produced???
workers TP Marginal product Fixed cost Variable cost Total cost Marginal cost Average fixed cost Average variable cost Average total cost 14 70 46 116 3.29 5 8.29 28 92 162 1.64 1.67 2.19 3.86 33 138 208 1.39 .93 1.84 2.77 37 184 254 1.24 .63 2.27 38 230 300 1.21 .47 1.53 2 30 276 346 .39 1.92 23 322 392 2.00 .34 1.59 1.93 13 368 438 3.54 .32 1.70 2.03 What happen to ATC as more products are produced???

Average costs graph

AFC will always get smaller as more products are produced
Why??? Fixed cost are spread out among more products AVC and ATC – always U shaped due to increasing and then diminishing returns Distance between ATC and AVC gets smaller as more products are produced

Marginal cost with Average costs ***

MC intersects ATC at min
MC intersects ATC at min. point Gap between ATC and AVC gets smaller as Q increases

TC VC What is the FC? At 9 units what is the: VC TC AVC ATC AFC 800
700 600 500 400 300 200 100 What is the FC? At 9 units what is the: VC TC AVC ATC AFC Costs (dollars) TC=\$500 FC=\$400 VC=\$100 Quantity 45

Practice reading MC ATC AVC 12 11 10 9 8 7 6 5 4 3 Costs (dollars) 2 1
At an output of 11, what is the : AVC MC AFC ATC TC VC Quantity 46

At output Q, what area represents:
Practice reading At output Q, what area represents: TC VC FC CDQ0 BEQ0 AFQ0 or CDEB 47

Relationship between ATC and MC
Costs (dollars) Average product and marginal product AP Relationship between ATC and MC MP The MC curve intersects the ATC curve at its lowest point. Quantity of labor Quantity of output MC When the marginal cost is below the average, it pulls the average down. When the marginal cost is above the average, it pulls the average up. ATC Example: The average income in the room is \$50,000. An additional (marginal) person enters the room: Bill Gates. If the marginal is greater than the average it pulls it up. 48

Things to remember about drawing cost curves:
1. Draw MC first (looks like a check mark) 2. Draw ATC – start at point above MC 3. Draw AVC – start at point above MC but below ATC 4. MC curve always intersects ATC and AVC at their minimum points 5. Distance between ATC and AVC gets smaller as output (quantity) increases 6.ATC and AVC are U shaped (due to increasing and then decreasing marginal returns)

TOPIC 4: Long run costs of production
Long run costs reflect changes in plant size

Definition and Purpose of the Long Run
In the long run all resources are variable. Plant capacity/size can change. Why is this important? The Long-Run is used for planning. Firms use to identify which plant size results in the lowest per unit cost. 3 things can happen in the long run 1. Economies of scale 2. Constant returns to scale 3. Diseconomies of scale 51

Long Run AVERAGE Total Cost
Costs MC1 ATC1 \$9,900,000 \$50,000 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 52

Long Run AVERAGE Total Cost
Company builds new plant ATC goes down due to mass production Costs MC1 ATC1 MC2 \$9,900,000 ATC2 \$50,000 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 53

Long Run AVERAGE Total Cost
Company builds new plant ATC goes down due to mass production Costs MC1 ATC1 MC2 \$9,900,000 MC3 ATC2 \$50,000 ATC3 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 54

Long Run AVERAGE Total Cost
Company builds more plants, ATC stays the same Costs MC1 ATC1 MC2 \$9,900,000 MC3 MC4 ATC2 \$50,000 ATC3 ATC4 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 55

Long Run AVERAGE Total Cost
Company builds more plants and ATC begins to increase Costs MC1 ATC1 MC2 \$9,900,000 MC5 MC3 ATC5 MC4 ATC2 \$50,000 ATC3 ATC4 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 56

Long Run AVERAGE Total Cost
Costs MC1 ATC1 MC2 \$9,900,000 MC5 MC3 ATC5 MC4 ATC2 \$50,000 ATC3 ATC4 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 57

Long Run AVERAGE Total Cost Where is the Long Run Average Cost Curve?
Costs MC1 ATC1 MC2 \$9,900,000 MC5 MC3 ATC5 MC4 ATC2 \$50,000 ATC3 ATC4 \$6,000 \$3,000 , , ,000,0000 Quantity Cars 58

The LRATC curve connects the lowest points on all of the SRATC curve (envelope)

Economies of Scale- LRATC curve is decreasing
Happens due to mass production techniques

Constant Returns to Scale- The ATC to produce is staying the same
LRATC is flat

Diseconomies of Scale- LRATC is increasing
Caused by a firm becoming too big “for own good”

Constant Returns to Scale Long Run Average Cost Curve
LRATC Simplified The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES. Costs Economies of Scale Constant Returns to Scale Diseconomies of Scale Long Run Average Cost Curve 63 Firm should select the size of firm that has lowest SRATC Quantity

Topic 5: Revenue Total Revenue = amount of \$ a firm takes in from selling a product TR = P X Q

Marginal revenue The increase in revenue that results from selling ONE more unit

Topic 6: PROFIT Profit = financial gain TOTAL REVENUE – TOTAL COST
TR>TC = PROFIT TR<TC = LOSS TR = TC = BREAK EVEN (normal profit)

Calculate profit Total product Total cost Total revenue Profit 50 700
500 80 800 100 850 1,000 130 900 1,300

Calculate profit Total product Total cost Total revenue Profit 50 700
500 -200 80 800 100 850 1,000 150 130 900 1,300 400

2 ways to improve profit 1. Increase revenue 2. decrease costs

Making a profit activity

Review: What is Revenue????

What are the different types of costs???
FIXED and VARIABLE cost EXPLICIT cost and an IMPLICIT cost

Profit total cost Video clip PROFIT = total revenue – Costs???

Marshmallow Towers Objective:
Your goal in this activity is the same goal of every business, to make PROFIT. Your assignment is to earn the most profit as you make a tower made only of toothpicks and mini-marshmallows. You will have 15 minutes

What does it cost to build the tower???

Fixed Costs Total Fixed Cost = \$ 800 rent \$500 property tax \$150
Insurance \$100 opportunity cost\$ \$ 50 Total Fixed Cost = \$ 800

Variable cost – will depend upon the # of marshmallows and toothpicks you use
\$50.00 each \$ each

How much will we earn for building our tower???
Revenue will be based on the HEIGHT and STRENGTH of your tower

HEIGHT Inches 1-4 = \$1,000 in inch
Every inch over 4 = \$2,000 each inch

Strength Can stand alone for at least 10 seconds = \$2,000
Can hold a sheet of paper on top for at least 10 seconds = \$2,000

Record Sheet You will record all costs on your record sheet You may purchase as many toothpicks and marshmallows as you wish RECORD THE NUMBER EACH TIME YOU PURCHASE! Marshmallows toothpicks ______ ________ _______ ________ Total # marshmallows ___ Total # toothpicks ______

Before tower is judged Marshmallows Toothpicks ______ ________ _______ ________ Total # marshmallows __ Total # toothpicks ____ X \$50 = ______ X \$100 = ______ Total Variable cost = ________

Stop Watch: 15:00

Discuss these questions as a group – answer on your record sheet
We could have improved our profit by….. How did your group try to minimize your costs? How did your group try to maximize your revenue? Why is it important to consider both cost and revenue when making business decisions?

Imperfect Competition
TOPIC 7: MARKET STRUCTURES Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly Imperfect Competition Most competition least competition 85

Perfect Competition Number of firms: Many (thousands) of small firms
Choice for Consumers: many Type of Good: identical products; perfect substitutes to each another Market Entry: very easy, no barriers to entry Amount of competition: Great deal; more than any other structure

Perfect competition Example: Agricultural products

Monopolistic Competition

Characteristics of monopolistic competition
Number of firms: hundreds of small companies Choice for consumers: many Type of Good: product DIFFERENTIATION Market Entry: easy, little barriers to entry Amount of competition: significant amount; non-price competition

Examples: monopolistic competition
Retail stores Restaurants Pizza

Oligopoly Number of firms: Few large companies Choice for Consumers: Few Type of Good: similar or different from one another Market entry: difficult to enter; barriers exist Amount of Competition: LITTLE One firm’s actions have impact on other firms Brand name recognition important

Examples: Oligopoly Soft drinks Cereal Athletic apparel

Example of how one firm in oligopoly impacts another

Monopoly Number of firms: Single Seller Choice for consumers: ONE
Type of Good: unique; no substitutes Amount of Competition: none (usually illegal because of this) Market Entry: Impossible 94

Example: Monopoly Utility companies

ID the market structure
Business 1: I’ve got plenty of competition. If I tried to raise my price, I’d lose business to the large firms that dominate our industry. I wait for them to raise prices and I follow along behind.

Business 2: New shops like mine are opening all the time – there are hundreds of us. I have to spend money on advertising to convince people that my shop is unique and different.

Business 3: I can’t afford to advertise; it would eat up what little profit I make. Besides, what good would it do? My product is the same as everyone else’s.

Business 4: My product is like no one else’s
Business 4: My product is like no one else’s. I work hard to make sure my firm stays out in front to avoid cutthroat competition.

Intellectual Property
Intellectual Property includes: secret formulas, ideas, inventions (products and processes), industrial designs, literary and artistic works (novels, films, music, architectural designs and web pages) Intellectual property is protected by: Patents Copyrights Trademarks

Patents legal right to exclude anyone else from manufacturing or marketing an invention Last for 20 years.

Strange patents ??? Anti-eating face mask Gerbil shirt

Copyrights protect written or artistic expressions - novels, poems, songs or movies. Lasts for the life of the author plus 50 years.

S. Victor Whitmill v. Warner Bros. Entertainment Inc. Tatoo (like Mike Tyson’s) in The Hangover Part 2. Warner Bros. and Whitmill worked out an agreement of undisclosed terms.

Mattel Inc. v. MGA Entertainment Inc
Mattel Inc. v. MGA Entertainment Inc. MGA Entertainment filed a lawsuit against Mattel, claiming that the line of My Scene Barbies copied the big-headed and slim-bodied physique of Bratz dolls

The Happy Birthday Song
The copyright belongs to Warner Music Group, and the company regularly charges up to \$30,000 to anyone who wants to use the song for profit

Trademarks Name, phrase, sound or symbol used in association with services or products.

Famous Trademarks “That’s hot!” “You’re Fired!”

“Fear the brow” “Let’s get ready to rumble”

“There’s an app for that”
“BAM!”

The seller has NO control over price.
Profit Topic 8: PERFECT Competition REVIEW Many small firms (thousands) Identical products (perfect substitutes) Easy for firms to enter the industry Firms are “Price Takers” The seller has NO control over price. Can only control Quantity they are producing 111

Demand for Perfectly Competitive Firms
Why are they Price Takers? If a firm charges above the market price, NO ONE will buy. Consumers will go to other firms There is no reason to lower price because consumers will buy the same amount at the market price. Since the price is the same at all quantities demanded, the demand curve for each firm is… Perfectly Elastic (A Horizontal straight line) 112

The Competitive Firm is a Price Taker Price is set by the Industry
\$15 \$15 D Q 5000 Q Firm (price taker) Industry 113

If price changes in the market, it will also change in the FIRM

The Competitive Firm is a Price Taker Price is set by the Industry
What is the additional revenue for selling an additional unit? 1st unit earns \$15 2nd unit earns 30 (15 more) Marginal revenue is constant at \$15 Notice: MR=D=AR=P P Demand \$15 MR=D=AR=P Q Firm (price taker) 115 115

For Perfect Competition: MR=D=AR=P
The Competitive Firm is a Price Taker Price is set by the Industry What is the additional revenue for selling an additional unit? 1st unit earns \$15 2nd unit earns \$15 Marginal revenue is constant at \$15 Notice: Total revenue increases at a constant rate MR equal Average Revenue P Demand \$15 MR=D=AR=P Q Firm (price taker) 116 116

Topic 9: Maximizing PROFIT in perfect competition
117

Short-Run Profit Maximization
What is the goal of every business? To Maximize Profit!!!!!! To maximum profit firms must make the right output How does a firm decide the right output???? MR< MC don’t produce MR> MC produce 118

How many products should this perfect competitive firm produce???
Price of item is \$20.00 TP TC MC MR

How many products should this perfect competitive firm produce???
What is the firm’s profit at this point??? TR-TC Price of item is \$20.00 TP TC MC MR \$20.00

*Profit would still be made at TP of 5, but profit not maximized
Price of item is \$20.00 TP TC MC MR Profit at TP of 4 = \$20 Profit at TP of 5 = \$10

Profit Maximizing Rule
MR=MC 122

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 2.86 7.14 2 30 200 1.33 6.67 6.25 3 300 7.5 10 4 45 400 .89 8.89 5 43 500 .93 11.63 -50

Increasing, diminishing and negative returns???
# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 2.86 7.14 2 30 16 200 1.33 6.67 6.25 3 10 300 7.5 4 45 5 400 .89 8.89 43 -2 500 .93 11.63 -50 Increasing, diminishing and negative returns???

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 2 30 16 200 240 1.33 6.67 6.25 3 10 300 340 7.5 4 45 5 400 440 .89 8.89 43 -2 500 540 .93 11.63 -50

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 3 300 340 7.5 8.5 4 45 5 400 440 .89 8.89 9.78 43 -2 500 540 .93 11.63 12.56 -50

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 300 3 340 7.5 8.5 400 4 45 5 440 .89 8.89 9.78 450 43 -2 500 540 .93 11.63 12.56 -50 430

In PC, Marginal revenue = price of product (remember MR=D=AR=P)
# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 300 3 340 7.5 8.5 400 4 45 5 440 .89 8.89 9.78 450 43 -2 500 540 .93 11.63 12.56 -50 430 In PC, Marginal revenue = price of product (remember MR=D=AR=P)

In PC, Marginal revenue = price of product (remember MR=D=AR=P)
# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 300 3 340 7.5 8.5 400 4 45 5 440 .89 8.89 9.78 450 43 -2 500 540 .93 11.63 12.56 -50 430 In PC, Marginal revenue = price of product (remember MR=D=AR=P)

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 300 60 3 340 7.5 8.5 400 4 45 5 440 .89 8.89 9.78 20 450 43 -2 500 540 .93 11.63 12.56 -50 430 -110

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 300 60 3 340 7.5 8.5 400 4 45 5 440 .89 8.89 9.78 20 450 43 -2 500 540 .93 11.63 12.56 -50 430 -110 How many products should this firm produce to maximize its profits ????

# of workers TP MP FC VC TC AFC AVC ATC MC TR MR profit 1 14 40 100 140 2.86 7.14 10 2 30 16 200 240 1.33 6.67 8 6.25 300 60 3 340 7.5 8.5 400 4 45 5 440 .89 8.89 9.78 20 450 43 -2 500 540 .93 11.63 12.56 -50 430 -110

MC in Perfect competition
Upward sloping part of MC curve = Supply of firm MC=S

MR = MC in perfect competition
Firm will produce the Q where MR=MC to maximize profit

Topic 10: Perfectly competitive firm in the short run
1. It can make a profit 2. Break even NORMAL PROFIT 3. Have a loss Firm will produce where MR=MC

1. Profit P > ATC profit

Break even point price = ATC

3. LOSS P < ATC ATC LOSS

Shut Down Rule A firm should continue to produce as long as the price is above the AVC When the price falls below AVC then the firm should minimize its losses by shutting down Why? If the price is below AVC the firm is losing more money by producing than they would have to pay to shut down.

If price changes in the market, it will also change in the FIRM and the firm should adjust their output Example: increase in S lowers P

Practice 141

Practice What Quantity will this firm produce?
What is this firm’s total revenue? What is this firm’s total cost? Is this firm experiencing a profit or loss? How much? ATC AVC \$20

` 1 What Quantity will this firm produce? 2 What is the TR at
this quantity? 3 What is the TC at this quantity? 4 Profit or Loss? How much?

Topic 11:Perfectly competitive firm in the Long run

Perfectly competitive firm in the long run
P=MR=MC=SRATC= LRATC All Perfectly competitive firms in the LORNG RUN earn a NORMAL economic profit (profit is 0)

Perfectly competitive firm in the Long run

In the long-run, what happens when economic profits are made?
When firms make profits, other firms enter the industry – this causes supply to increase which causes prices to go down When prices go down, profits go down

In the long-run, what happens when losses are made?
When firms incur a loss, firms start to leave the industry – this causes supply to decrease which causes prices to go up When prices go up, profit goes up

Topic 12: Efficiency Perfectly competitive markets are perfectly efficient They have BOTH productive and allocative efficiency in the long run 149

Productive Efficiency
The production of a good in a least costly way. Graphically it is where… Price = Minimum ATC 150

Long-Run Equilibrium MC ATC Price D=MR
Notice that the product is being made at the lowest possible cost (Minimum ATC) Q Quantity 151

Allocative Efficiency
Producers are making the products most wanted by society. Graphically it is where… Price = MC 152

Optimal amount being produced
Long-Run Equilibrium MC MR P Price Optimal amount being produced Q Quantity 153

Long-Run Equilibrium P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! MC
Price D=MR P P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! Q Quantity 154

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