1. Perfect Competition - Final

2. Objectives Investigate firms’ costs under perfect competition
Explain the meaning and implication of shut down point
Discuss why is perfect competition is economically efficient
Review milk essay structure
Conduct a self assessment to help revision

3. Feedback on homework - Steel
Anderton p329
Add these marks to the Q’s – to give you an idea of quantity required in answers….
Q1 = 4
Q2 = 10
Q3 = 6

4. Two of you to come up and run through your structures on the board
To what extent does the dairy market reflect the characteristics of Perfect Competition?
Louis
Luke
Rory
Toby
Morgan
It’s your lucky day!
Two of you to come up and run through your structures on the board

5. Shut down point

6. First a bit of practice on your basics..
I will show you a series of slides and will ask a person to read and complete the sentence…

7. Profit-Maximizing Level of Output
The goal of the firm is to _____________ __________.
When it decides what quantity to produce it continually asks how changes in quantity affect ____________.

8. Profit-Maximizing Level of Output
The goal of the firm is to maximize profits.
When it decides what quantity to produce it continually asks how changes in quantity affect profit.

9. Profit-Maximizing Level of Output
Since profit is the difference between _____ _________ and _____ ____, what happens to profit in response to a change in output is determined by marginal revenue (MR) and marginal cost (MC).
A firm maximizes profit when __ = __.

10. Profit-Maximizing Level of Output
Since profit is the difference between total revenue and total cost, what happens to profit in response to a change in output is determined by marginal revenue (MR) and marginal cost (MC).
A firm maximizes profit when MC = MR.

11. Profit-Maximizing Level of Output
_______ ________ (__) – the change in total revenue associated with a change in quantity.
_______ ____ (__) -- the change in total cost associated with a change in quantity.

12. Marginal Revenue
Since a perfect competitor accepts the market price as given, for a competitive firm, marginal revenue is _____ ( __ = _).

13. Marginal Revenue
Since a perfect competitor accepts the market price as given, for a competitive firm, marginal revenue is price (MR = P).

14. Marginal Cost Initially, marginal cost _____ and then begins to _____.
Marginal concepts are best defined between the numbers.

15. Marginal Cost Initially, marginal cost falls and then begins to rise.
Marginal concepts are best defined between the numbers.

16. How to Maximize Profit
To maximize profits, a firm should produce where _______ ______ equals _______ ________.

17. How to Maximize Profit
To maximize profits, a firm should produce where marginal cost equals marginal revenue.

18. How to Maximize Profit
If marginal revenue does not equal marginal cost, a firm can increase profit by changing _______.
The supplier will continue to produce as long as _______ _______ is less than _______ _______.

19. How to Maximize Profit
If marginal revenue does not equal marginal cost, a firm can increase profit by changing output.
The supplier will continue to produce as long as marginal cost is less than marginal revenue.

20. How to Maximize Profit
The supplier will cut back on production if _______ ________ is greater than _______ ________.
Thus, the profit-maximizing condition of a competitive firm is __ = __ = _.

21. How to Maximize Profit
The supplier will cut back on production if marginal cost is greater than marginal revenue.
Thus, the profit-maximizing condition of a competitive firm is MC = MR = P.

22. Marginal Cost, Marginal Revenue, and PriceMC 1 2 3 4 5 6 7 8 9 10
£28.00
20.00
16.00
14.00
12.00
17.00
22.00
30.00
40.00
54.00
68.00
Price = MR
Quantity Produced
Marginal Cost
£35.00
35.00
Costs 1 2 3 4 5 6 7 8 9 10
Quantity 60 50 40 30 20 C A
P = D = MR A B

23. The Marginal Cost Curve Is the Supply Curve
The marginal cost curve is the firm's supply curve above the point where price exceeds average variable cost.

24. The Marginal Cost Curve Is the Supply Curve
The MC curve tells the competitive firm how much it should produce at a given price.
The firm can do no better than producing the quantity at which marginal cost equals price which in turn equals marginal revenue.

25. The Marginal Cost Curve Is the Firm’s Supply Curve
Cost, Price
£70 60 50 40 30 20 10 1
Quantity 2 3 4 5 6 7 8 9 C A B

26. Shut down point

27. Shut down point Profit / Loss (£mln) 1 30 20 50 60 +10 -20 2 3 40 -10
Trading situation getting worse
Profit / Loss (£mln)
Period
Total VC
Total FC
Total Costs
Total Revenue
If production takes place
If plant is shut down 1 30 20 50 60
+10
-20 2 3 40
-10 4 5
-30
Still making a profit - carry on trading
Break-even (includes ‘normal profit’
Making a loss but not as bad as if plant shut down
Making a loss equal to loss plant shut down
Cheaper for the company to shut down

28. The Shutdown Point
The firm will shut down if it cannot cover average variable costs.
A firm should continue to produce as long as price is greater than average variable cost.
Once price falls below that point it makes sense to shut down temporarily and save the variable costs.

29. The Shutdown Point
The shutdown point is the point at which the firm will gain more by shutting down than it will by staying in business.

30. The Shutdown Point
As long as total revenue is more than total variable cost, temporarily producing at a loss is the firm’s best strategy since it is taking less of a loss than it would by shutting down.

31. Market price is lower that ATC. Hence the firm is making a loss
The Shutdown Decision
Profit maximisation MR = MC MC
Price
ATC
Market price is lower that ATC. Hence the firm is making a loss
Loss
P = MR
Firm should continue to produce as long as price is greater than average variable cost.
AVC
Once price falls below this point it makes sense to shut down temporarily and save the variable costs
Quantity

32. What does Michael O’Leary think?

33. Homework review: Label the diagram

34. Is Perfect Competition economically efficient?

35. Efficiency Put together a definition of “efficiency” in your own words
Whiteboards
Put together a definition of “efficiency” in your own words
Now define what you understand by the term “productive efficiency”
Now define what you understand by the term “allocative efficiency”

36. Productive efficiency
Attained when a firm…
operates at minimum average total cost
Choosing an appropriate combination of inputs (cost efficiency)
Producing the maximum output possible from those inputs (technical efficiency) AC
In the LONG run! P
The best resource mix! O Q1 Q
To attain productive efficiency,
both technical AND cost efficiency need to be achieved

37. Allocative efficiency
Achieved when society is producing an appropriate bundle of goods relative to consumer preferences
Firms can be productively efficient producing loads of stuff nobody wants!
Under Perfect Competition the ‘Consumer is King’ and ultimately determine which resources are used to produce which goods and services
Allocative efficiency is achieved when the marginal benefit to society
is equal to the marginal cost,
in other words where price is set equal to marginal cost
In both the SHORT and the LONG run

38. Dynamic Efficiency
This is to do with the rate o investment…would it be better if the firm invested money over time rather than distribute profits?
Dynamic efficiency occurs over time. (as opposed to Productive and Allocative which are at a point in time – static efficiency)
It focuses on changes in the consumer choice available in a market together with the quality / performance of goods and services that we buy
Dynamic efficiency: We assume that a perfectly competitive market produces homogeneous products – in other words, there is little scope for innovation designed to make products differentiated from each other and thereby allow a supplier to develop and then exploit a competitive advantage in the market to establish some monopoly power.

39. Now tell me, are Perfectly Competitive markets economically efficient?
You have 5 mins to dig out the article I gave you and put together your case using a diagram

40. Benefits of PC Lower prices Low barriers to entry
Large number of competing firms
High elastic demand curve
Low barriers to entry
New firms enter and keep prices low
Greater entrepreneurial activity
In SR entrepreneurs strive for profit – finding ways to outdo other businesses
Economic efficiency
competition will ensure that firms attempt to minimise their costs and move towards productive efficiency
The threat of competition should lead to a faster rate of technological diffusion as firms have to be particularly responsive to the changing needs of consumers….dynamic efficiency.

41. Homework
Complete worksheet on Perfect Competition for Monday Oct 10

42. Plenary
Analyse diagrammatically the behaviour of firms in a PC market structure
Recap on how to answer questions and recognising trigger words
Investigate firms’ costs under perfect competition
Explain the meaning and implication of shut down point