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Perfect Competition 1. Review 1.Identify the 4 Market Structures 2.Identify the characteristics of perfect competition 3.Why is a perfectly competitive.

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Presentation on theme: "Perfect Competition 1. Review 1.Identify the 4 Market Structures 2.Identify the characteristics of perfect competition 3.Why is a perfectly competitive."— Presentation transcript:

1 Perfect Competition 1

2 Review 1.Identify the 4 Market Structures 2.Identify the characteristics of perfect competition 3.Why is a perfectly competitive firm a “price taker”? 4.Explain why perfectly competitive firms make little profit 5.How do ALL firms determine what output to produce? 6.Draw a perfectly competitive firm producing 10 units at a price of $10 making a profit of $30 7.Draw and label a perfectly competitive firm making a loss. 8.On your graph, identify the shut down point 9.List 10 words that rhyme with the word “great” 2

3 P Q P Q 5000 D S Industry Firm (price taker) $15 Side-by-side graph for perfectly completive industry and firm. 3 AVC MR=D ATC MC 8 Is the firm making a profit or a loss? Why?

4 Total Revenue $ Cost and Revenue MC AVC ATC Where is the profit maximization point? How do you know? MR=P Total Cost Profit How much is the profit or loss? What is TR?What is TC? Where is the Shutdown Point? What output should be produced? 4

5 Supply Revisited 5

6 $ Cost and Revenue AVC ATC 6 MR 1 Marginal Cost and Supply MR 2 MR 3 MR 4 MR 5 MC Q As price increases, the quantity increases

7 When price increases, quantity increases When price decrease, quantity decreases $ Cost and Revenue AVC ATC 7 Marginal Cost and Supply MC Q = Supply MC above AVC is the supply curve

8 What if variable costs increase (ex: tax)? $ Cost and Revenue AVC 8 Marginal Cost and Supply Q MC 1 =Supply 1 AVC MC 2 =Supply 2 When MC increases, SUPPLY decrease

9 What if variable costs decrease (ex: subsidy)? $ Cost and Revenue AVC 9 Marginal Cost and Supply Q MC 1 =Supply 1 AVC MC 2 =Supply 2 When MC decreases, SUPPLY increases

10 Perfect Competition in the Long-Run 10 You are a wheat farmer. You learn that there is a more profit in making corn. What do you do in the long run?

11 In the Long-run… Firms will enter if there is profit Firms will leave if there is loss So, ALL firms break even, they make NO economic profit (No Economic Profit=Normal Profit) In long run equilibrium a perfectly competitive firm is EXTREMELY efficient. 11

12 P Q P Q 5000 D S Industry Firm (price taker) $15 Side-by-side graph for perfectly completive industry and firm in the LONG RUN 12 MR=D ATC MC 8 Is the firm making a profit or a loss? Why?

13 Price = MC = Minimum ATC Firm making a normal profit Firm in Long-Run Equilibrium 13 P Q $15 13 MR=D ATC MC 8 There is no incentive to enter or leave the industry TC = TR

14 Going from Long-Run to Short-Run 14

15 P Q P Q 5000 D S IndustryFirm $15 15 MR=D ATC MC 8 1.Is this the short or the long run? Why? 2.What will firms do in the long run? 3.What happens to P and Q in the industry? 4.What happens to P and Q in the firm? 6000

16 P Q P Q 5000 D S IndustryFirm $15 16 MR=D ATC MC 8 S1S1 $10 Firms enter to earn profit so supply increases in the industry Price decreases and quantity increases 6000

17 P Q P Q 5000 D S IndustryFirm $15 17 MR=D ATC MC 8 Price falls for the firm because they are price takers. Price decreases and quantity decreases S1S1 $10 MR 1 =D

18 P Q P Q 5000 D IndustryFirm 18 ATC MC New Long Run Equilibrium at $10 Price Zero Economic Profit S1S1 $10 MR 1 =D

19 P Q P Q 5000 D S IndustryFirm $15 19 MR=D ATC MC 8 1.Is this the short or the long run? Why? 2.What will firms do in the long run? 3.What happens to P and Q in the industry? 4.What happens to P and Q in the firm? 4000

20 P Q P Q 5000 D S IndustryFirm $15 20 MR=D MC 8 S1S1 $20 Firms leave to avoid losses so supply decreases in the industry Price increases and quantity decreases ATC 4000

21 P Q P Q 5000 D S IndustryFirm $15 21 MR=D MC 8 S1S1 $20 Price increase for the firm because they are price takers. Price increases and quantity increases ATC 4000 MR 1 =D 1 9 $20

22 P Q P Q D IndustryFirm 22 MC S1S1 $20 New Long Run Equilibrium at $20 Price Zero Economic Profit ATC 4000 MR 1 =D 1 9 $20

23 Going from Long-Run to Long-Run 23

24 P Q P Q 5000 D S IndustryFirm $15 24 MR=D MC 8 Currently in Long-Run Equilibrium If demand increases, what happens in the short-run and how does it return to the long run? ATC MR 1 =D 1

25 P Q P Q 5000 D S IndustryFirm $15 25 MR=D MC 8 D1D1 $20 Demand Increases The price increases and quantity increases Profit is made in the short-run ATC MR 1 =D 1 9 $20

26 P Q P Q 5000 D S IndustryFirm $15 26 MR=D MC 8 D1D1 $20 Firms enter to earn profit so supply increases in the industry Price Returns to $15 ATC MR 1 =D 1 9 $ S1S1

27 P Q P Q D IndustryFirm $15 27 MR=D MC 8 D1D1 Back to Long-Run Equilibrium The only thing that changed from long-run to long-run is quantity in the industry ATC 7000 S1S1

28 Efficiency 28

29 PURE COMPETITION AND EFFICIENCY Perfect Competition forces producers to use limited resources to their fullest. Inefficient firms have higher costs and are the first to leave the industry. Perfectly competitive industries are extremely efficient In general, efficiency is the optimal use of societies scarce resources 1. Productive Efficiency 2. Allocative Efficiency There are two kinds of efficiency: 29

30 Efficiency Revisited Bikes Computers A B C D F E Which points are productively efficient? Which are allocatively efficient? G 30 Productive Efficient combinations are A through D (they are produced at the lowest cost) Allocative Efficient combinations depend on the wants of society

31 Productive Efficiency Price = Minimum ATC The production of a good in a least costly way. (Minimum amount of resources are being used) Graphically it is where… 31

32 P Q MC ATC Quantity Price Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point). Short-Run Profit 32 D=MR

33 P Q MC ATC Quantity Price Notice that the product is NOT being made at the lowest possible cost (ATC not at lowest point). Short-Run Loss 33 D=MR

34 P Q MC ATC Quantity Price Notice that the product is being made at the lowest possible cost (Minimum ATC) Long-Run Equilibrium 34

35 Allocative Efficiency Price = MC Producers are allocating resources to make the products most wanted by society. Graphically it is where… 35 Why? Price represents the benefit people get from a product.

36 P MR Q MC Quantity Price The marginal benefit to society (as measured by the price) equals the marginal cost. Long-Run Equilibrium Optimal amount being produced 36

37 $5 MR 15 MC Quantity Price The marginal benefit to society is greater the marginal cost. Not enough produced. Society wants more What if the firm makes 15 units? 20 Underallocation of resources $3 37

38 $5 MR 22 MC Quantity Price The marginal benefit to society is less than the marginal cost. Too much Produced. Society wants less 20 Overallocation of resources $7 38 What if the firm makes 22 units?

39 P D=MR Q MC ATC Quantity Price P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! Long-Run Equilibrium 39


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