1 In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine the quantity that maximizes profits? When might a competitive firm shut down in the short run? Exit the market in the long run? What does the market supply curve look like in the short run? In the long run?
2 Introduction: A Scenario 简介：情景讨论 Three years after graduating, you run your own business. You must decide how much to produce, what price to charge, how many workers to hire, etc. What factors should affect these decisions? Your costs (studied in preceding chapter) How much competition you face We begin by studying the behavior of firms in perfectly competitive markets.
3 Characteristics of Perfect Competition 完全竞争的特征 1. Many buyers and many sellers 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. 1. Many buyers and many sellers 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. Because of 1 & 2, each buyer and seller is a “price taker” – takes the price as given.
4 The Revenue of a Competitive Firm 竞争企业的收益 Total revenue (TR) Average revenue (AR) Marginal Revenue (MR): The change in TR from selling one more unit. ∆TR ∆Q∆Q MR = TR = P x Q TR Q AR = = P
A C T I V E L E A R N I N G 1 : Exercise Fill in the empty spaces of the table. 5 $50$105 $40$104 3 2 1 n.a.$100 TRPQ MRAR $10
A C T I V E L E A R N I N G 1 : Answers Fill in the empty spaces of the table. 6 $50$105 $40$104 3 2 1 n.a. $30 $20 $10 $0$100 TR = P x QPQ ∆TR ∆Q∆Q MR = TR Q AR = $10 Notice that MR = P
7 MR = P for a Competitive Firm 对竞争企业而言，边际收益等于物品的价格 A competitive firm can keep increasing its output without affecting the market price. So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P. MR = P is only true for firms in competitive markets.
8 Profit Maximization 利润最大化 What Q maximizes the firm’s profit? To find the answer, “Think at the margin.” If increase Q by one unit, revenue rises by MR, cost rises by MC. If MR > MC, then increase Q to raise profit. If MR < MC, then reduce Q to raise profit.
9 Profit Maximization 利润最大化 505 404 303 202 101 45 33 23 15 9 $5$00 Profit = MR – MC MCMRProfitTCTRQ At any Q with MR > MC, increasing Q raises profit. 5 7 7 5 1 –$5 10 –2 0 2 4 $6 12 10 8 6 $4$10 (continued from earlier exercise) At any Q with MR < MC, reducing Q raises profit.
10 P1P1 MR MC and the Firm’s Supply Decision 边际成本与企业的供给决策 At Q a, MC < MR. So, increase Q to raise profit. At Q b, MC > MR. So, reduce Q to raise profit. At Q 1, MC = MR. Changing Q would lower profit. Q Costs MC Q1Q1 QaQa QbQb Rule: MR = MC at the profit-maximizing Q.
11 P1P1 MR P2P2 MR 2 MC and the Firm’s Supply Decision 边际成本与企业的供给决策 If price rises to P 2, then the profit- maximizing quantity rises to Q 2. The MC curve determines the firm’s Q at any price. Hence, Q Costs MC Q1Q1 Q2Q2 the MC curve is the firm’s supply curve.
12 Shutdown vs. Exit 停止营业与退出 Shutdown: A short-run decision not to produce anything because of market conditions. Exit: A long-run decision to leave the market. A key difference: If shut down in SR, must still pay FC. If exit in LR, zero costs.
13 A Firm’s Short-run Decision to Shut Down 企业短期停止营业决策 Cost of shutting down: revenue loss = TR Benefit of shutting down: cost savings = VC (firm must still pay FC) So, shut down if TR < VC. Divide both sides by Q: TR/Q < VC/Q So, firm’s decision rule is: Shut down if P < AVC
14 The firm’s SR supply curve is the portion of its MC curve above AVC. Q Costs A Competitive Firm’s SR Supply Curve 竞争企业 SR 的供给曲线 MC ATC AVC If P > AVC, then firm produces Q where P = MC. If P < AVC, then firm shuts down (produces Q = 0).
15 The Irrelevance of Sunk Costs 与 沉淀成本无关 Sunk cost: a cost that has already been committed and cannot be recovered Sunk costs should be irrelevant to decisions; you must pay them regardless of your choice. FC is a sunk cost: The firm must pay its fixed costs whether it produces or shuts down. So, FC should not matter in the decision to shut down.
16 A Firm’s Long-Run Decision to Exit 企业退出一个市场的长期决策 Cost of exiting the market: revenue loss = TR Benefit of exiting the market: cost savings = TC (zero FC in the long run) So, firm exits if TR < TC. Divide both sides by Q to write the firm’s decision rule as: Exit if P < ATC
17 A New Firm’s Decision to Enter Market 新 企业进入一个市场的决策 In the long run, a new firm will enter the market if it is profitable to do so: if TR > TC. Divide both sides by Q to express the firm’s entry decision as: Enter if P > ATC
18 The firm’s LR supply curve is the portion of its MC curve above LRATC. Q Costs The Competitive Firm’s Supply Curve 竞争企业的供给曲线 MC LRATC
A C T I V E L E A R N I N G 2 A : Identifying a firm’s profit Determine this firm’s total profit. Identify the area on the graph that represents the firm’s profit. 19 Q Costs, P MC ATC P = $10 MR 50 $6 A competitive firm
profit A C T I V E L E A R N I N G 2 A : Answers 20 Q Costs, P MC ATC P = $10 MR 50 $6 A competitive firm profit per unit = P – ATC = $10 – 6 = $4 Total profit = (P – ATC) x Q = $4 x 50 = $200
A C T I V E L E A R N I N G 2 B : Identifying a firm’s loss Determine this firm’s total loss, assuming AVC < $3. Identify the area on the graph that represents the firm’s loss. 21 Q Costs, P MC ATC A competitive firm $5 P = $3 MR 30
loss MR P = $3 A C T I V E L E A R N I N G 2 B : Answers 22 Q Costs, P MC ATC A competitive firm loss per unit = $2 Total loss = (ATC – P) x Q = $2 x 30 = $60 $5 30
23 Market Supply: Assumptions 市场供给 ：假设 1) All existing firms and potential entrants have identical costs. 2) Each firm’s costs do not change as other firms enter or exit the market. 3)The number of firms in the market is fixed in the short run (due to fixed costs) variable in the long run (due to free entry and exit)
24 The SR Market Supply Curve 短期市场的供给曲线 As long as P ≥ AVC, each firm will produce its profit-maximizing quantity, where MR = MC. Recall from Chapter 4: At each price, the market quantity supplied is the sum of quantities supplied by all firms.
25 The SR Market Supply Curve 短期市场的供给曲线 MC P2P2 Market Q P (market) One firm Q P (firm) S P3P3 Example: 1000 identical firms. At each P, market Q s = 1000 x (one firm’s Q s ) AVC P2P2 P3P3 30 P1P1 20 10 P1P1 30,000 10,000 20,000
26 Entry & Exit in the Long Run 进入或退出一个市场的长期决策 In the LR, the number of firms can change due to entry & exit. If existing firms earn positive economic profit, New firms enter, SR market supply shifts right. P falls, reducing profits and slowing entry. If existing firms incur losses, some firms exit, SR market supply shifts left. P rises, reducing remaining firms’ losses.
27 The Zero-Profit Condition 零利润的条件 Long-run equilibrium: The process of entry or exit is complete – remaining firms earn zero economic profit. Zero economic profit occurs when P = ATC. Since firms produce where P = MR = MC, the zero-profit condition is P = MC = ATC. Recall that MC intersects ATC at minimum ATC. Hence, in the long run, P = minimum ATC.
28 Why Do Firms Stay in Business if Profit = 0? 为什么企业利润为零仍然经营 Recall, economic profit is revenue minus all costs – including implicit costs, like the opportunity cost of the owner’s time and money. In the zero-profit equilibrium, firms earn enough revenue to cover these costs accounting profit is positive
29 The LR Market Supply Curve 长期市场供给曲线 MC Market Q P (market) One firm Q P (firm) In the long run, the typical firm earns zero profit. LRATC long-run supply P = min. ATC The LR market supply curve is horizontal at P = minimum ATC.
30 S1S1 Profit D1D1 P1P1 long-run supply D2D2 SR & LR Effects of an Increase in Demand SR & LR 对需求增长的影响 MC ATC P1P1 Market Q P (market) One firm Q P (firm) P2P2 P2P2 Q1Q1 Q2Q2 S2S2 Q3Q3 A firm begins in long-run eq’m… …but then an increase in demand raises P,… …leading to SR profits for the firm. Over time, profits induce entry, shifting S to the right, reducing P… …driving profits to zero and restoring long-run eq’m. A B C
31 Why the LR Supply Curve Might Slope Upward 为什么 LR 供给曲线会向上倾斜 The LR market supply curve is horizontal if 1) all firms have identical costs, and 2) costs do not change as other firms enter or exit the market. If either of these assumptions is not true, then LR supply curve slopes upward.
32 1)Firms Have Different Costs 企业的成本不同 As P rises, firms with lower costs enter the market before those with higher costs. Further increases in P make it worthwhile for higher-cost firms to enter the market, which increases market quantity supplied. Hence, LR market supply curve slopes upward. At any P, For the marginal firm, P = minimum ATC and profit = 0. For lower-cost firms, profit > 0.
33 2)Costs Rise as Firms Enter the Market 随着企业进入市场成本增加 In some industries, the supply of a key input is limited (e.g., there’s a fixed amount of land suitable for farming). The entry of new firms increases demand for this input, causing its price to rise. This increases all firms’ costs. Hence, an increase in P is required to increase the market quantity supplied, so the supply curve is upward-sloping.
34 CONCLUSION: The Efficiency of a Competitive Market 结论： 竞争性市场的效率 Profit-maximization:MC = MR Perfect competition: P = MR So, in the competitive eq’m: P = MC Recall, MC is cost of producing the marginal unit. P is value to buyers of the marginal unit. So, the competitive eq’m is efficient, maximizes total surplus. In the next chapter, monopoly: pricing & production decisions, deadweight loss, regulation.
35 CHAPTER SUMMARY For a firm in a perfectly competitive market, price = marginal revenue = average revenue. If P > AVC, a firm maximizes profit by producing the quantity where MR = MC. If P < AVC, a firm will shut down in the short run. If P < ATC, a firm will exit in the long run. In the short run, entry is not possible, and an increase in demand increases firms’ profits. With free entry and exit, profits = 0 in the long run, and P = minimum ATC.
36 profit A Firm With Profits 有盈利的企业 Q Costs, P MC ATC P MR Q ATC profit per unit = P – ATC revenue per unit = cost per unit = profit-maximizing quantity
37 ATC loss A Firm With Losses 有亏损的企业 Q Costs, P MC ATC P MR Q loss per unit revenue per unit = cost per unit = loss-minimizing quantity
39 Introduction 导言 A monopoly is a firm that is the sole seller of a product without close substitutes. In this chapter, we study monopoly and contrast it with perfect competition. The key difference: A monopoly firm has market power, the ability to influence the market price of the product it sells. A competitive firm has no market power.
40 Why Monopolies Arise 产生垄断的原因 The main cause of monopolies is barriers to entry – other firms cannot enter the market. Three sources of barriers to entry: 1.A single firm owns a key resource. E.g., DeBeers owns most of the world’s diamond mines 2.The govt gives a single firm the exclusive right to produce the good. E.g., patents, copyright laws
41 Why Monopolies Arise 产生垄断的原因 3.Natural monopoly: a single firm can produce the entire market Q at lower ATC than could several firms. Q Cost ATC 1000 $50 Example: 1000 homes need electricity. Electricity ATC slopes downward due to huge FC and small MC ATC is lower if one firm services all 1000 homes than if two firms each service 500 homes. 500 $80
42 Monopoly vs. Competition: Demand Curves 垄断与竞争：需求曲线 In a competitive market, the market demand curve slopes downward. but the demand curve for any individual firm’s product is horizontal at the market price. The firm can increase Q without lowering P, so MR = P for the competitive firm. D P Q A competitive firm’s demand curve
43 Monopoly vs. Competition: Demand Curves 垄断与竞争：需求曲线 A monopolist is the only seller, so it faces the market demand curve. To sell a larger Q, the firm must reduce P. Thus, MR ≠ P. D P Q A monopolist’s demand curve
44 A C T I V E L E A R N I N G 1 : A monopoly’s revenue Moonbucks is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. What is the relation between P and AR? Between P and MR? 44 QPTRARMR 0$4.50 14.00 23.50 33.00 42.50 52.00 61.50 n.a.
45 A C T I V E L E A R N I N G 1 : Answers Here, P = AR, same as for a competitive firm. Here, MR < P, whereas MR = P for a competitive firm. 45 1.506 2.005 2.504 3.003 3.502 1.50 2.00 2.50 3.00 3.50 $4.004.001 n.a. 9 10 9 7 4 $ 0$4.500 MRARTRPQ –1 0 1 2 3 $4
47 Introduction: Between Monopoly and Competition 简介：垄断与竞争 Two extremes Competitive markets: many firms, identical products Monopoly: one firm In between these extremes Oligopoly: only a few sellers offer similar or identical products. Monopolistic competition: many firms sell similar but not identical products.
48 Measuring Market Concentration 衡量市场集中 Concentration ratio: the percentage of the market’s total output supplied by its four largest firms. The higher the concentration ratio, the less competition. This chapter focuses on oligopoly, a market structure with high concentration ratios.
49 Concentration Ratios in Selected U.S. Industries 美国工业的集中比率 IndustryConcentration ratio Video game consoles100% Tennis balls100% Credit cards99% Batteries94% Soft drinks93% Web search engines92% Breakfast cereal92% Cigarettes89% Greeting cards88% Beer85% Cell phone service82% Autos79%
50 PQ $0140 5130 10120 15110 20100 2590 3080 3570 4060 4550 EXAMPLE: Cell Phone Duopoly in Smalltown 示例：小城市的手机双寡头 Smalltown has 140 residents The “good”: cell phone service with unlimited anytime minutes and free phone Smalltown’s demand schedule Two firms: T-Mobile, Verizon (duopoly: an oligopoly with two firms) Each firm’s costs: FC = $0, MC = $10
52 EXAMPLE: Cell Phone Duopoly in Smalltown 示例：小城市的手机双寡头 One possible duopoly outcome: collusion Collusion: an agreement among firms in a market about quantities to produce or prices to charge T-Mobile and Verizon could agree to each produce half of the monopoly output: For each firm: Q = 30, P = $40, profits = $900 Cartel: a group of firms acting in unison, e.g., T-Mobile and Verizon in the outcome with collusion
53 A C T I V E L E A R N I N G 1 : Collusion vs. self-interest Duopoly outcome with collusion: Each firm agrees to produce Q = 30, earns profit = $900. If T-Mobile reneges on the agreement and produces Q = 40, what happens to the market price? T-Mobile’s profits? Is it in T-Mobile’s interest to renege on the agreement? If both firms renege and produce Q = 40, determine each firm’s profits. 53 PQ $0140 5130 10120 15110 20100 2590 3080 3570 4060 4550
54 A C T I V E L E A R N I N G 1 : Answers If both firms stick to agreement, each firm’s profit = $900 If T-Mobile reneges on agreement and produces Q = 40: Market quantity = 70, P = $35 T-Mobile’s profit = 40 x ($35 – 10) = $1000 T-Mobile’s profits are higher if it reneges. Verizon will conclude the same, so both firms renege, each produces Q = 40: Market quantity = 80, P = $30 Each firm’s profit = 40 x ($30 – 10) = $800 PQ $0140 5130 10120 15110 20100 2590 3080 3570 4060 4550
55 Collusion vs. Self-Interest 合作与自我兴趣 Both firms would be better off if both stick to the cartel agreement. But each firm has incentive to renege on the agreement. Lesson: It is difficult for oligopoly firms to form cartels and honor their agreements.
56 A C T I V E L E A R N I N G 2 : The oligopoly equilibrium If each firm produces Q = 40, market quantity = 80 P = $30 each firm’s profit = $800 Is it in T-Mobile’s interest to increase its output further, to Q = 50? Is it in Verizon’s interest to increase its output to Q = 50? 56 PQ $0140 5130 10120 15110 20100 2590 3080 3570 4060 4550
57 A C T I V E L E A R N I N G 2 : Answers If each firm produces Q = 40, then each firm’s profit = $800. If T-Mobile increases output to Q = 50: Market quantity = 90, P = $25 T-Mobile’s profit = 50 x ($25 – 10) = $750 T-Mobile’s profits are higher at Q = 40 than at Q = 50. The same is true for Verizon. 57 PQ $0140 5130 10120 15110 20100 2590 3080 3570 4060 4550
59 Introduction to Monopolistic Competition 垄断竞争介绍 Monopolistic competition: a market structure in which many firms sell products that are similar but not identical. Examples: apartments books bottled water clothing fast food night clubs
60 Comparing Perfect & Monop. Competition 完全竞争与垄断性竞争的比较 yesnone, price-takerfirm has market power? downward- sloping horizontalD curve facing firm differentiatedidenticalthe products firms sell zero long-run econ. profits yes free entry/exit many number of sellers monopolistic competition perfect competition