2 Review Identify the 4 Market Structures Identify the characteristics of perfect competitionWhy is a perfectly competitive firm a “price taker”?Explain why perfectly competitive firms make little profitHow do ALL firms determine what output to produce?Draw a perfectly competitive firm producing 10 units at a price of $10 making a profit of $30Draw and label a perfectly competitive firm making a loss.On your graph, identify the shut down pointList 10 words that rhyme with the word “great”
3 Side-by-side graph for perfectly completive industry and firm. Is the firm making a profit or a loss? Why?PSPMCATCMR=D$15$15AVCDQ50008QFirm(price taker)Industry3
4 Where is the profit maximization point? How do you know? What output should be produced?What is TR?What is TC?How much is the profit or loss?Where is the Shutdown Point?$25201510MCMR=PProfitATCCost and RevenueAVCTotal RevenueTotal Cost
6 Marginal Cost and Supply As price increases, the quantity increases $5045403530252015105MCATCMR5Cost and RevenueAVCMR4MR3MR2MR1Q6
7 MC above AVC is the supply curve Marginal Cost and SupplyWhen price increases, quantity increasesWhen price decrease, quantity decreases$5045403530252015105MC= SupplyATCCost and RevenueAVCQ7
8 Marginal Cost and Supply What if variable costs increase (ex: tax)?MC2=Supply2$5045403530252015105MC1=Supply1AVCCost and RevenueAVCWhen MC increases, SUPPLY decreaseQ8
9 Marginal Cost and Supply What if variable costs decrease (ex: subsidy)?MC1=Supply1$5045403530252015105MC2=Supply2AVCCost and RevenueAVCWhen MC decreases, SUPPLY increasesQ9
10 Perfect Competition in the Long-Run 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 (No Economic Profit=Normal Profit) In the Long-run…Firms will enter if there is profitFirms will leave if there is lossSo, 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.
12 Is the firm making a profit or a loss? Why? Side-by-side graph for perfectly completive industry and firm in the LONG RUNIs the firm making a profit or a loss? Why?PSPMCATCMR=D$15$15DQ50008QFirm(price taker)Industry12
13 Firm in Long-Run Equilibrium Price = MC = Minimum ATCFirm making a normal profitPMCATC$15MR=DThere is no incentive to enter or leave the industryTC = TR8Q13
29 1. Productive Efficiency 2. Allocative Efficiency PURE COMPETITION AND EFFICIENCYIn general, efficiency is the optimal use of societies scarce resourcesPerfect 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 efficientThere are two kinds of efficiency:1. Productive Efficiency2. Allocative Efficiency
30 Efficiency Revisited Productive Efficient combinations are A through D Which points are productively efficient?Which are allocatively efficient?1412108642Productive Efficient combinations are A through D(they are produced at the lowest cost)ABGBikesAllocative Efficient combinations depend on the wants of societyCEFDComputers30
31 Productive Efficiency The production of a good in a least costly way. (Minimum amount of resources are being used)Graphically it is where…Price = Minimum ATC
32 Short-Run MC ATC D=MR Price ProfitPricePNotice that the product is NOT being made at the lowest possible cost(ATC not at lowest point).QQuantity
33 Short-Run MC ATC Price D=MR Quantity P Q LossD=MRNotice that the product is NOT being made at the lowest possible cost (ATC not at lowest point).QQuantity
34 Long-Run Equilibrium MC ATC Price D=MR Notice that the product is being made at the lowest possible cost (Minimum ATC)QQuantity
35 Why? Price represents the benefit people get from a product. Allocative EfficiencyProducers are allocating resources to make the products most wanted by society.Graphically it is where…Price = MCWhy? Price represents the benefit people get from a product.
36 Optimal amount being produced Long-Run EquilibriumMCMRPPriceOptimal amount being producedThe marginal benefit to society (as measured by the price) equals the marginal cost.QQuantity
37 What if the firm makes 15 units? MCMR$5PriceThe marginal benefit to society is greater the marginal cost.Not enough produced.Society wants more$31520Underallocation of resourcesQuantity
38 What if the firm makes 22 units? MC$7MR$5PriceThe marginal benefit to society is less than the marginal cost.Too much Produced.Society wants less2022Overallocation of resourcesQuantity
39 Long-Run Equilibrium P = Minimum ATC = MC EXTREMELY EFFICIENT!!!! MC D=MRPricePP = Minimum ATC = MCEXTREMELY EFFICIENT!!!!QQuantity39