1. © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney Prepared by: 장 선 구 ( 웅지세무대학 )

2. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 2 of 35 완전경쟁시장과 공급곡선에 대해서 학습한다. 완전경쟁적 기업의 산출량 결정 수준, 진입과 퇴출의 결정, 산업공급곡선 그리고 완전경쟁시장의 균형에 대한 설명을 한다. 과점기업과 독점기업과 비교하기 위해서 2000 년 발생한 캘리포니아 에너지 위기와 의약품의 사레를 들어 설명한다.

3. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 3 of 35 Whether it’s organic strawberries or satellites, how a good is produced determines its cost of production. What you will learn in this chapter: ➤ The meaning of perfect competition and the characteristics of a perfectly competitive industry ➤ The difference between accounting profit and economic profit, and why economic profit is the correct basis for decisions. ➤ How a price-taking producer determines its profit-maximizing quantity of output ➤ How to assess whether or not a producer is profitable and why an unprofitable producer may continue to operate in the short run ➤ Why industries behave differently in the short run and the long run ➤ What determines the industry supply curve in both the short run and the long run

4. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 4 of 35 Perfect Competition A price-taking producer is a producer whose actions have no effect on the market price of the good it sells. A price-taking consumer is a consumer whose actions have no effect on the market price of the good he or she buys.

5. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 5 of 35 Perfect Competition A perfectly competitive market is a market in which all market participants are price- takers. Defining Perfect Competition A perfectly competitive industry is an industry in which producers are pricetakers.

6. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 6 of 35 Perfect Competition A producer’s market share is the fraction of the total industry output represented by that producer’s output. Two Necessary Conditions for Perfect Competition A good is a standardized product, also known as a commodity, when consumers regard the products of different producers as the same good.

7. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 7 of 35 Perfect Competition There is free entry and exit into and from an industry when new producers can easily enter into or leave that industry. Free Entry and Exit

8. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 8 of 35 Production and Profits TABLE 8-1 Profit for Jennifer and Jason’s Farm When Market Price Is $18 Quantity of tomatoes Q (bushels) Total revenue TR = P x Q Total cost TC Profit TR − TC 0$0$14$−14 11830−12 236 0 3544410 4725616 5907218 61089216 712611610

9. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 9 of 35 Production and Profits (8-1) (8-2) Profit is the difference between revenue and cost.

10. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 10 of 35 Production and Profits Using Marginal Analysis to Choose the Profit- Maximizing Quantity of Output The principle of marginal analysis says that the optimal quantity of an activity is the quantity at which marginal benefit is equal to marginal cost.

11. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 11 of 35 Production and Profits Using Marginal Analysis to Choose the Profit- Maximizing Quantity of Output Marginal revenue is the change in total revenue generated by an additional unit of output. (8-3) Change in total revenue generated by one additional unit of output The optimal output rule says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost. or

12. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 12 of 35 Production and Profits Using Marginal Analysis to Choose the Profit- Maximizing Quantity of Output TABLE 8-2 Short-Run Costs for Jennifer and Jason’s Farm Quantity of tomatoes Q (bushels) Variable cost VC Total cost TC Marginal cost of bushel MC = ΔTC/ΔQ Marginal Revenue of bushel Net gain of bushel = MR − MC 0$0$14 $16$18$2 11630 61812 22236 81810 33044 12186 44256 16182 55872 2018−2 67892 2418−6 7102116

13. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 13 of 35 Production and Profits Using Marginal Analysis to Choose the Profit- Maximizing Quantity of Output The price-taking firm’s optimal output rule says that a price-taking firm’s profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced. The marginal revenue curve shows how marginal revenue varies as output varies.

14. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 14 of 35 Production and Profits Using Marginal Analysis to Choose the Profit- Maximizing Quantity of Output

15. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 15 of 35 Production and Profits Accounting Profit versus Economic Profit The accounting profit of a business is the business’s revenue minus the explicit cost and depreciation. The economic profit of a business is the business’s revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.

16. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 16 of 35 Production and Profits Accounting Profit versus Economic Profit The capital of a business is the value of its assets – equipment, buildings, tools, inventory, and financial assets. The implicit cost of capital is the opportunity cost of the capital used by a business – the income the owner could have realized from that capital if it had been used in its next best alternative way.

17. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 17 of 35 Production and Profits When Is Production Profitable? TABLE 8-3 Average Costs for Jennifer and Jason’s Farm Quantity of tomatoes Q (bushels) Variable cost VC Total cost TC Average variable cost of bushel AVC = VC/Q Average total cost of bushel ATC = TC/Q 1 $16.00$30.00$16.00$30.00 2 22.0036.0011.0018.00 3 30.0044.0010.0014.67 4 42.0056.0010.5014.00 5 58.0072.0011.6014.40 6 78.0092.0013.0015.33 7 102.00116.0014.5716.57

18. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 18 of 35 Production and Profits When Is Production Profitable?

19. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 19 of 35 Production and Profits When Is Production Profitable? (8-4) ■ If P > ATC, the firm is profitable. ■ If P = ATC, the firm breaks even. ■ If P < ATC, the firm incurs a loss. (8-5) or, equivalently,

20. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 20 of 35 Production and Profits When Is Production Profitable?

21. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 21 of 35 Production and Profits When Is Production Profitable?

22. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 22 of 35 Production and Profits When Is Production Profitable? ■ Whenever the market price exceeds minimum average total cost, the producer is profitable. ■ Whenever the market price equals minimum average total cost, the producer breaks even. ■ Whenever the market price is less than minimum average total cost, the producer is unprofitable. The break-even price of a price-taking firm is the market price at which it earns zero profits. The rule for determining whether a producer of a good is profitable depends on a comparison of the market price of the good to the producer’s break- even price—its minimum average total cost:

23. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 23 of 35 Production and Profits The Short-Run Production Decision

24. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 24 of 35 Production and Profits The Short-Run Production Decision A firm will cease production in the short run if the market price falls below the shut-down price, which is equal to minimum average variable cost. A sunk cost is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions. The short-run individual supply curve shows how an individual producer’s profit-maximizing output quantity depends on the market price, taking fixed cost as given.

25. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 25 of 35 Production and Profits Changing Fixed Cost Although fixed cost cannot be altered in the short run, in the long run the level of fixed cost is a matter of choice. In most perfectly competitive industries the set of producers, although fixed in the short run, changes in the long run as firms enter or leave the industry.

26. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 26 of 35 Production and Profits Summing Up: The Perfectly Competitive Firm’s Profitability and Production Conditions TABLE 8-4 Summary of the Perfectly Competitive Firm’s Profitability and Production Conditions Profitability Condition (minimum ATC = break-even price) Result P > minimum ATCFirm profitable. Entry into industry in the long run. P = minimum ATC Firm breaks even. No entry into or exit from industry in the long run. P < minimum ATCFirm unprofitable. Exit from industry in the long run. Production Condition (minimum AVC = shut-down price)Result P > minimum AVC Firm produces in the short run. If P minimum ATC, firm covers all variable cost and fixed cost. P = minimum AVC Firm indifferent between producing in the short run or not. Just covers variable cost. P < minimum AVCFirm shuts down in the short run. Does not cover variable cost.

27. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 27 of 35 The Industry Supply Curve The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole.

28. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 28 of 35 The Industry Supply Curve The short-run industry supply curve shows how the quantity supplied by an industry depends on the market price, given a fixed number of producers. There is a short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given. The Short-Run Industry Supply Curve

29. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 29 of 35 The Industry Supply Curve The Short-Run Industry Supply Curve

30. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 30 of 35 The Industry Supply Curve The Long-Run Industry Supply Curve

31. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 31 of 35 The Industry Supply Curve The Long-Run Industry Supply Curve A market is in long-run market equilibrium when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.

32. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 32 of 35 The Industry Supply Curve The Long-Run Industry Supply Curve

33. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 33 of 35 The Industry Supply Curve The Long-Run Industry Supply Curve The long-run industry supply curve shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.

34. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 34 of 35 The Industry Supply Curve The Long-Run Industry Supply Curve

35. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 35 of 35 The Industry Supply Curve The Cost of Production and Efficiency in Long-run Equilibrium First, in a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms. Second, in a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium. The third and final conclusion is that the long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited. Our analysis leads us to three conclusions about the cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry.

36. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 36 of 35 Price-taking producer Price-taking consumer Perfectly competitive market Perfectly competitive industry Market share Standardized product Commodity Free entry and exit Principle of marginal analysis Marginal revenue Optimal output rule Price-taking firm’s optimal output rule Marginal revenue curve Accounting profit Economic profit Capital Implicit cost of capital Break-even price Shut-down price Sunk costs Short-run individual supply curve Industry supply curve Short-run industry supply curve Short-run market equilibrium Long-run market equilibrium Long-run industry supply curve K E Y T E R M S