2. 10 - 1 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Pure Competition 10 C H A P T E R

3. 10 - 2 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum FOUR MARKET MODELS Pure Competition

4. 10 - 3 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition FOUR MARKET MODELS Pure Monopoly

5. 10 - 4 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly FOUR MARKET MODELS Imperfect Competition

6. 10 - 5 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly FOUR MARKET MODELS Monopolistic Competition

7. 10 - 6 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition FOUR MARKET MODELS Oligopoly

8. 10 - 7 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Market Structure Continuum Pure Competition Pure Monopoly Monopolistic Competition Oligopoly FOUR MARKET MODELS Pure Competition: Very Large Numbers Standardized Product “Price Takers” Free Entry and Exit

9. 10 - 8 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER Perfectly Elastic Demand Price Taker Role Total Revenue Average Revenue Marginal Revenue For example...

10. 10 - 9 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 0$ 0 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER

11. 10 - 10 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 131 0 1 $ 0 131 $131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ]

12. 10 - 11 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 131 0 1 2 $ 0 131 262 $131 131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ]

13. 10 - 12 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 131 0 1 2 3 $ 0 131 262 393 $131 131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ]

14. 10 - 13 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 131 0 1 2 3 4 $ 0 131 262 393 524 $131 131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ] ]

15. 10 - 14 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 131 0 1 2 3 4 5 6 7 8 9 10 $ 0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ] ] ] ] ] ] ] ]

16. 10 - 15 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $131 131 0 1 2 3 4 5 6 7 8 9 10 $ 0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 Product Price (P) (Average Revenue) Total Revenue (TR) Marginal Revenue (MR) Quantity Demanded (Q) DEMAND AS SEEN BY A PURELY COMPETITIVE SELLER ] ] ] ] ] ] ] ] ] ] Graphically Presented…

17. 10 - 16 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show DEMAND, MARGINAL REVENUE, AND TOTAL REVENUE IN PURE COMPETITION TR D = MR 1 2 3 4 5 6 7 8 9 10 1179 1048 917 786 655 524 393 262 131 0 Price and revenue Quantity Demanded (sold)

18. 10 - 17 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show SHORT RUN PROFIT MAXIMIZATION Two Approaches... First: Total-Revenue -Total Cost Approach The Decision Rule: Produce in the short-run if it can realize 1- A profit (or) 2- A loss less than its fixed costs The Decision Process: Should the firm produce? What quantity should be produced? What profit or loss will be realized?

19. 10 - 18 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show SHORT RUN PROFIT MAXIMIZATION Two Approaches... First: Total-Revenue -Total Cost Approach The Decision Rule: Produce in the short-run if it can realize 1- A profit (or) 2- A loss less than its fixed costs The Decision Process: Should the firm produce? What quantity should be produced? What profit or loss will be realized? Applied Graphically…

20. 10 - 19 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Total Cost 0 1 2 3 4 5 6 7 8 9 10 Total Product Total Fixed Cost Total Variable Cost Total Revenue Profit $ 100 100 $ 0 90 170 240 300 370 450 540 650 780 930 $ 100 190 270 340 400 470 550 640 750 880 1030 Price: $131 - $100 - 59 - 8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 TOTAL REVENUE-TOTAL COST APPROACH $ 0 131 262 393 524 655 786 917 1048 1179 1310 Can you see the profit maximization?

21. 10 - 20 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Total Cost 0 1 2 3 4 5 6 7 8 9 10 Total Product Total Fixed Cost Total Variable Cost Total Revenue Profit $ 100 100 $ 0 90 170 240 300 370 450 540 650 780 930 $ 100 190 270 340 400 470 550 640 750 880 1030 Price: $131 - $100 - 59 - 8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 TOTAL REVENUE-TOTAL COST APPROACH $ 0 131 262 393 524 655 786 917 1048 1179 1310 Graphing Total Cost & Revenue

22. 10 - 21 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 Total revenue and total cost Total Revenue Total Cost Maximum Economic Profits $299 Break-Even Point (Normal Profit) Break-Even Point (Normal Profit) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 TOTAL REVENUE-TOTAL COST APPROACH

23. 10 - 22 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show SHORT RUN PROFIT MAXIMIZATION Two Approaches... First: Total-Revenue -Total Cost Approach Three Characteristics: The rule applies only if producing is preferred to shutting down Rule applies to all markets Rule can be restated P=MC Second: Marginal-Revenue -Marginal Cost Approach MR = MC Rule

24. 10 - 23 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Average Total Cost 0 1 2 3 4 5 6 7 8 9 10 Total Product Average Fixed Cost Average Variable Cost Price = Marginal Revenue Total Economic Profit/Loss $100.00 50.00 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00 $90.00 85.00 80.00 75.00 74.00 75.00 77.14 81.25 86.67 93.00 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 - $100 - 59 - 8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 MARGINAL REVENUE-MARGINAL COST APPROACH $ 131 131 Marginal Cost 90 80 70 60 70 80 90 110 130 150 The same profit maximizing result!

25. 10 - 24 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Average Total Cost 0 1 2 3 4 5 6 7 8 9 10 Total Product Average Fixed Cost Average Variable Cost Price = Marginal Revenue Total Economic Profit/Loss $100.00 50.00 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00 $90.00 85.00 80.00 75.00 74.00 75.00 77.14 81.25 86.67 93.00 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 - $100 - 59 - 8 + 53 + 124 + 185 + 236 + 277 + 298 + 299 + 280 MARGINAL REVENUE-MARGINAL COST APPROACH $ 131 131 Marginal Cost 90 80 70 60 70 80 90 110 130 150 Graphically

26. 10 - 25 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $200 150 100 50 0 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR AVC ATC Economic Profit $131.00 $97.78 MARGINAL REVENUE-MARGINAL COST APPROACH Profit Maximization Position

27. 10 - 26 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $200 150 100 50 0 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR AVC ATC Economic Profit $131.00 $97.78 MARGINAL REVENUE-MARGINAL COST APPROACH MR = MC Optimum Solution Profit Maximization Position

28. 10 - 27 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show The MR=MC rule still applies If the price is lowered from $131 to $81 …But the MR = MC point changes MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position

29. 10 - 28 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $200 150 100 50 0 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR AVC ATC Economic Loss $81.00 $91.67 MARGINAL REVENUE-MARGINAL COST APPROACH Loss Minimization Position

30. 10 - 29 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show $200 150 100 50 0 Cost and Revenue 1 2 3 4 5 6 7 8 9 10 MC MR AVC ATC $71.00 MARGINAL REVENUE-MARGINAL COST APPROACH Short-Run Shut Down Point Minimum AVC is the Shut-Down Point

31. 10 - 30 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply Price Quantity Supplied Maximum Profit (+) Or Minimum Loss (-) Observe the impact upon profitability as price is changed $151 131 111 91 81 71 61 10 9 8 7 6 0 $+480 +299 +138 -3 -64 -100

32. 10 - 31 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Cost and Revenue, (dollars) MC MR 1 AVC ATC MARGINAL REVENUE-MARGINAL COST APPROACH Quantity Supplied MR 2 MR 3 MR 4 MR 5 P1P1 P2P2 P3P3 P4P4 P5P5 Q2Q2 Q3Q3 Q4Q4 Q5Q5 Marginal Cost & Short-Run Supply Do not Produce – Below AVC

33. 10 - 32 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Cost and Revenue, (dollars) MC MR 1 MARGINAL REVENUE-MARGINAL COST APPROACH Quantity Supplied MR 2 MR 3 MR 4 MR 5 P1P1 P2P2 P3P3 P4P4 P5P5 Q2Q2 Q3Q3 Q4Q4 Q5Q5 Marginal Cost & Short-Run Supply Yields the Short-Run Supply Curve Supply No Production Below AVC

34. 10 - 33 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply AVC 2 MC 2 Higher Costs Move the Supply Curve to the Left Cost and Revenue, (dollars) MC 1 AVC 1 Quantity Supplied S1S1 S2S2

35. 10 - 34 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MARGINAL REVENUE-MARGINAL COST APPROACH Marginal Cost & Short-Run Supply AVC 2 MC 2 Lower Costs Move the Supply Curve to the Right Cost and Revenue, (dollars) MC 1 AVC 1 Quantity Supplied S1S1 S2S2

36. 10 - 35 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q S=MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) Economic Profit $111 SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium

37. 10 - 36 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q S=MC AVC ATC 8 D P Q 8000 D S=  MC’s Industry Firm (price taker) Economic Profit $111 SHORT RUN COMPETITIVE EQUILIBRIUM The Competitive Firm “Takes” it’s Price from the Industry Equilibrium How about the long-run?

38. 10 - 37 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PROFIT MAXIMIZATION IN THE LONG-RUN Assumptions... Entry and Exit Only Identical Costs Constant-Cost Industry Goal... Price = Minimum ATC Zero Economic Profit Model

39. 10 - 38 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Temporary Profits and the Reestablishment Of Long-Run Equilibrium S1S1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $60 50 40 $60 50 40 PROFIT MAXIMIZATION IN THE LONG-RUN MR D1D1

40. 10 - 39 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show An increase in demand increases profits… MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $60 50 40 $60 50 40 PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Economic Profits S1S1

41. 10 - 40 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show New Competitors increase supply and lower Prices decrease economic profits MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $60 50 40 $60 50 40 PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Zero Economic Profits S1S1 S2S2

42. 10 - 41 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Decreases in demand, Losses and the Reestablishment of Long-Run Equilibrium S1S1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $60 50 40 $60 50 40 PROFIT MAXIMIZATION IN THE LONG-RUN D1D1 MR

43. 10 - 42 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show A decrease in demand creates losses… MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $60 50 40 $60 50 40 PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Economic Losses S1S1

44. 10 - 43 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show MR D1D1 MC ATC P Q 100 P Q 100,000 Industry Firm (price taker) $60 50 40 $60 50 40 PROFIT MAXIMIZATION IN THE LONG-RUN D2D2 Return to Zero Economic Profits S1S1 S3S3 Competitors with losses decrease supply and prices return to zero economic profits

45. 10 - 44 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show LONG-RUN SUPPLY IN A CONSTANT COST INDUSTRY Constant Cost Industry Perfectly Elastic Long-Run Supply Graphically...

46. 10 - 45 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q =$50 S D1D1 Z1Z1 Q1Q1 D2D2 Z2Z2 Q2Q2 Q3Q3 D3D3 Z3Z3 100,000110,00090,000 LONG-RUN SUPPLY IN A CONSTANT COST INDUSTRY P1P2P3P1P2P3

47. 10 - 46 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q =$50 S D1D1 Z1Z1 Q1Q1 D2D2 Z2Z2 Q2Q2 Q3Q3 D3D3 Z3Z3 100,000110,00090,000 LONG-RUN SUPPLY IN A CONSTANT COST INDUSTRY P1P2P3P1P2P3 How does an increasing cost industry differ?

48. 10 - 47 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q $55 50 45 S D1D1 Y1Y1 Q1Q1 D2D2 Y2Y2 Q2Q2 Q3Q3 D3D3 Y3Y3 100,000110,00090,000 LONG-RUN SUPPLY IN AN INCREASING COST INDUSTRY P1P2P3P1P2P3

49. 10 - 48 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q $55 50 45 S D1D1 Y1Y1 Q1Q1 D2D2 Y2Y2 Q2Q2 Q3Q3 D3D3 Y3Y3 100,000110,00090,000 P1P2P3P1P2P3 How does a decreasing cost industry differ? LONG-RUN SUPPLY IN AN INCREASING COST INDUSTRY

50. 10 - 49 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P Q $55 50 45 S D1D1 Y1Y1 Q1Q1 D2D2 Y2Y2 Q2Q2 Q3Q3 D3D3 Y3Y3 100,000110,00090,000 P1P2P3P1P2P3 What is the long- run competitive equilibrium? LONG-RUN SUPPLY IN AN INCREASING COST INDUSTRY

51. 10 - 50 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show P MR Q MC ATC Quantity Price Price = MC = Minimum ATC (normal profit) LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM

52. 10 - 51 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC

53. 10 - 52 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Resources are efficiently allocated under competition

54. 10 - 53 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Consumer Surplus

55. 10 - 54 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show PURE COMPETITION AND EFFICIENCY Productive Efficiency Price = Minimum ATC Allocative Efficiency Price = MC Underallocation Price > MC Overallocation Price < MC Chapter Conclusions

56. pure competition pure monopoly monopolistic competition oligopoly imperfect competition price taker average revenue total revenue marginal revenue break-even point MR = MC rule short-run supply curve long-run supply curve constant-cost industry increasing-cost industry decreasing-cost industry productive efficiency allocative efficiency ENDBACK Copyright McGraw-Hill/Irwin 2002

57. 10 - 56 Copyright McGraw-Hill/Irwin, 2002 Four Market Models Demand as seen by a Purely Competitive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost Approach Short-Run Competitive Equilibrium Long-Run Supply Long-Run Equilibrium for a Competitive Firm Pure Competition and Efficiency Key Terms Previous Slide Next Slide End Show Coming Next... Pure Monopoly Chapter 24