Presentation is loading. Please wait.

Presentation is loading. Please wait.

FIRMS IN COMPETITIVE MARKETS. Characteristics of Perfect Competition 1.There are many buyers and sellers in the market. 2.The goods offered by the various.

Similar presentations


Presentation on theme: "FIRMS IN COMPETITIVE MARKETS. Characteristics of Perfect Competition 1.There are many buyers and sellers in the market. 2.The goods offered by the various."— Presentation transcript:

1 FIRMS IN COMPETITIVE MARKETS

2 Characteristics of Perfect Competition 1.There are many buyers and sellers in the market. 2.The goods offered by the various sellers are largely the same. 3.Firms can freely enter or exit the market. 4.The individual firm produces a small portion of total market output. 5.The firm cannot have any influence over the price it charges. 6.The individual firm in a perfectly competitive market is a price taker. 7. It takes the price determined by the market as the price that it will receive for its output.

3 Revenue of a Competitive Firm Total revenue for a firm is the selling price times the quantity sold. TR = (P X Q)

4 Revenue of a Competitive Firm Total revenue is proportional to the amount of output.

5 Revenue of a Competitive Firm Average revenue tells us how much revenue a firm receives for the typical unit sold.

6 Revenue of a Competitive Firm In perfect competition, average revenue equals the price of the good.

7 Revenue of a Competitive Firm In perfect competition, average revenue equals the price of the good.

8 Revenue of a Competitive Firm Marginal revenue is the change in total revenue from an additional unit sold. MR =  TR/  Q

9 Revenue of a Competitive Firm For competitive firms, marginal revenue equals the price of the good.

10 Profit Maximization for the Competitive Firm The goal of a competitive firm is to maximize profit. This means that the firm will want to produce the quantity that maximizes the difference between total revenue and total cost.

11 Profit Maximization for the Competitive Firm Profit maximization occurs at the quantity where marginal revenue equals marginal cost. If MR > MC, increase Q to increase profit. If MR < MC, decrease Q to increase profit. If MR = MC, profit is maximized.

12 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue

13 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue ATC AVC

14 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC

15 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC P P = AR = MR

16 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC Q MAX P = AR = MR The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. P

17 Profit Maximization for the Competitive Firm A competitive firm will adjust its production level until quantity reaches Q MAX where profit is maximized.

18 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC Q MAX P = AR = MR P

19 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC MC 1 Q1Q1 Q MAX P = MR 1 P = AR = MR

20 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC MC 1 Q1Q1 Q MAX P = MR 1 P = AR = MR MR > MC, increase Q

21 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC MC 2 Q2Q2 Q MAX P = MR 2 P = AR = MR

22 Profit Maximization for the Competitive Firm Quantity 0 Costs and Revenue MC ATC AVC MC 2 Q2Q2 Q MAX P = MR 2 P = AR = MR MR < MC, decrease Q

23 The Firm’s Decision to Shut Down A shutdown refers to a short-run decision not to produce anything during a specific period of time. Exit refers to a long-run decision to leave the market.

24 The Firm’s Decision to Shut Down The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down. Sunk costs are costs that have already been committed and cannot be recovered.

25 The Firm’s Decision to Shut Down The firm shuts down if the revenue it gets from producing is less than the variable cost of production. Shut down if TR < VC Shut down if TR/Q < VC/Q Shut down if P < AVC

26 The Firm’s Decision to Shut Down Quantity0 Costs

27 The Firm’s Decision to Shut Down Quantity MC ATC AVC 0 Costs

28 The Firm’s Decision to Shut Down Quantity MC ATC AVC 0 Costs If P > ATC, keep producing at a profit.

29 The Firm’s Decision to Shut Down Quantity MC ATC AVC 0 Costs If P > ATC, keep producing at a profit. If P > AVC, keep producing in the short run.

30 The Firm’s Decision to Shut Down Quantity MC ATC AVC 0 Costs If P > ATC, keep producing at a profit. If P < AVC, shut down. If P > AVC, keep producing in the short run.

31 The Firm’s Decision to Shut Down The portion of the marginal-cost curve that lies above average variable cost is the competitive firm’s short-run supply curve.

32 The Firm’s Decision to Shut Down Quantity MC ATC AVC 0 Costs If P > ATC, keep producing at a profit. If P > AVC, keep producing in the short run. If P < AVC, shut down.

33 The Firm’s Decision to Shut Down Quantity MC ATC AVC 0 Costs Firm’s short-run supply curve

34 The Long-Run Decision to Exit an Industry In the long-run, the firm exits if the revenue it would get from producing is less than its total cost. Exit if TR < TC Exit if TR/Q < TC/Q Exit if P < ATC

35 The Long-Run Decision to Enter an Industry A firm will enter the industry if such an action would be profitable. Enter if TR > TC Enter if TR/Q > TC/Q Enter if P > ATC

36 The Competitive Firm’s Long- Run Supply Curve

37 Quantity0 Costs

38 The Competitive Firm’s Long- Run Supply Curve Quantity MC ATC AVC 0 Costs

39 The Competitive Firm’s Long- Run Supply Curve Firm enters if P > ATC Quantity MC ATC AVC 0 Costs

40 The Competitive Firm’s Long- Run Supply Curve Firm enters if P > ATC Firm exits if P < ATC Quantity MC ATC AVC 0 Costs

41 The Competitive Firm’s Long- Run Supply Curve The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.

42 The Competitive Firm’s Long- Run Supply Curve Firm enters if P > ATC Firm exits if P < ATC Quantity MC ATC AVC 0 Costs

43 The Competitive Firm’s Long- Run Supply Curve Quantity MC ATC AVC 0 Costs Firm’s long-run supply curve

44 The Firm’s Short-Run and Long-Run Supply Curves Short-Run Supply Curve The portion of its marginal cost curve that lies above average variable cost. Long-Run Supply Curve The marginal cost curve above the minimum point of its average total cost curve.

45 Profit as the Area Between Price and Average Total Cost

46 Quantity0 Price

47 Profit as the Area Between Price and Average Total Cost Quantity0 Price ATCMC

48 Profit as the Area Between Price and Average Total Cost Quantity0 Price P = AR = MR ATCMC P

49 Profit as the Area Between Price and Average Total Cost Quantity0 Price ATCMC P ATC Q Profit-maximizing quantity P = AR = MR

50 Profit as the Area Between Price and Average Total Cost Quantity0 Price Profit ATCMC P ATC Q Profit-maximizing quantity P = AR = MR

51 Loss as the Area Between Price and Average Total Cost

52 Quantity0 Price ATCMC

53 Loss as the Area Between Price and Average Total Cost Quantity0 Price ATCMC P P = AR = MR

54 Loss as the Area Between Price and Average Total Cost Quantity0 Price ATC MC Q Loss-minimizing quantity P P = AR = MR

55 Loss as the Area Between Price and Average Total Cost Quantity0 Price ATC Loss ATCMC Q Loss-minimizing quantity P P = AR = MR

56 Quick Quiz! How does the price faced by a profit- maximizing competitive firm compare to its marginal cost?

57 Quick Quiz! When will a profit-maximizing firm decide to shut down?

58 Supply in a Competitive Market Market supply equals the sum of the quantities supplied by the individual firms in the market.

59 Supply in a Competitive Market Market Supply with a Fixed Number of Firms For any given price, each firm supplies a quantity of output so that price equals its marginal cost. The market supply curve reflects the individual firms’ marginal cost curves.

60 Supply in a Competitive Market Market Supply with Entry and Exit Firms will enter or exit the market until profit is driven to zero. In the long-run, price equals the minimum of average total cost. The long-run market supply curve is horizontal at this price.

61 The Supply Curve in a Competitive Market (a) Firm’s Zero-Profit Condition Quantity (firm) 0 Price P = minimum ATC (b) Market Supply Quantity (market) Price 0 Supply MC ATC

62 Increase in Demand in the Short Run An increase in demand raises price and quantity in the short run. Firms earn profits because price now exceeds average total cost.

63 Initial Condition Market Firm Quantity (firm) 0 Price Quantity (market) Price 0

64 Initial Condition Market Firm Quantity (firm) 0 Price MC ATC P1P1 Quantity (market) Price 0 D1D1 P1P1 Q1Q1 A S 1 Long-run supply

65 Short-Run Response Market Firm Quantity (firm) 0 Price P1P1 Quantity (market) Price 0 D 1 D 2 P1P1 Q1Q1 A S 1 Long-run supply MC ATC P1P1 B

66 Short-Run Response Market Firm Quantity (firm) 0 Price MC ATC P1P1 P2P2 Quantity (market) Price 0 D 1 D 2 P1P1 Q1Q1 Q2Q2 P2P2 A B S 1 Long-run supply

67 Short-Run Response Market Firm Quantity (firm) 0 Price MC ATC Profit P1P1 P2P2 Quantity (market) Price 0 D 1 D 2 P1P1 Q1Q1 Q2Q2 P2P2 A B S 1 Long-run supply

68 Increase in Demand in the Long Run Over time, the short-run supply curve shifts as profits encourage new firms to enter the market.

69 Increase in Demand in the Long Run Price falls as new firms enter the market.

70 Increase in Demand in the Long Run In the new long-run equilibrium profits return to zero and price returns to minimum average total cost.

71 Increase in Demand in the Long Run The market has more firms to satisfy the greater demand.

72 Long-Run Response Market Firm Quantity (firm) 0 Price MC ATC Profit P1P1 P2P2 Quantity (market) Price 0 D 1 D 2 P1P1 Q1Q1 Q2Q2 P2P2 A B S 1 Long-run supply

73 Long-Run Response Market Firm Quantity (firm) 0 Price MC ATC Profit P1P1 P2P2 Quantity (market) Price 0 P1P1 Q1Q1 Q2Q2 P2P2 A B Long-run supply S2S2 D1D1 D2D2 S1S1

74 Long-Run Response Market Firm Quantity (firm) 0 Price MC ATC P1P1 Quantity (market) Price 0 D1D1 D2D2 P1P1 Q1Q1 Q2Q2 P2P2 A B S1S1 Long-run supply S2S2

75 Increase in Demand in the Short and Long Run Market Firm Quantity (firm) 0 Price MC ATC P1P1 Quantity (market) Price 0 D2D2 P1P1 Q1Q1 D1D1 Q2Q2 A B S1S1 Long-run supply S2S2 Q3Q3 C

76 Why the Long-Run Supply Curve Might Slope Upward Some resources used in production may be available only in limited quantities. Firms may have different costs.

77 Conclusion Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces. The price of the good equals both the firm’s average revenue and its marginal revenue

78 Conclusion To maximize profit a firm chooses the quantity of output where marginal revenue equals marginal cost. This is also the quantity at which price equals marginal cost.

79 Conclusion In the short run, the firm will choose to shut down temporarily if the price of the good is less than average variable cost. In the long run, it will choose to exit if the price is less than average total cost.

80 Conclusion If firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production in the long run. The number of firms adjusts to drive the market back to the zero-profit equilibrium.

81 Conclusion Because firms can enter and exit more easily in the long run than the short run, the long-run supply curve is typically more elastic than the short-run supply curve.

82 FIRMS IN COMPETITIVE MARKETS End of Chapter 14

83

84 Quantity 0 Costs and Revenue MC ATC AVC MC 2 MC 1 Q1Q1 Q2Q2 Q MAX P = MR 1 = MR 2 P = AR = MR The firm maximizes profit by producing the quantity at which marginal cost equals marginal revenue. Figure 14-1

85 Quantity0 Price MC ATC AVC P2P2 P1P1 Q1Q1 Q2Q2 Figure 14-2

86 Quantity MC ATC AVC 0 Costs Firm shuts down if P < AVC Firm’s short-run supply curve Figure 14-3

87 Firm exits if P < ATC Quantity MC ATC AVC 0 Costs Firm’s long-run supply curve Figure 14-4

88 (a) A Firm with Profits Quantity0 Price P = AR = MR Profit ATCMC P ATC Q (profit-maximizing quantity) Figure 14-5a

89 (b) A Firm with Losses Quantity0 Price ATC Loss ATCMC Q (loss-minimizing quantity) P P = AR = MR Figure 14-5b

90 (a) Individual Firm Supply Quantity (firm)0 Price MC $2.00 1.00 100200 (b) Market Supply Quantity (market)0 Price Supply $2.00 1.00 100,000200,000 Figure 14-6

91 (a) Firms Zero-Profit Condition Quantity (firm)0 Price PP= minimum ATC (b) Market Supply Quantity (market) Price 0 Supply MC ATC Figure 14-7

92 Firm (a) Initial Condition Quantity (firm)0 Price Market Quantity (market) Long-run supply Price 0 Demand Short-run supply P 1 P MC ATC P 1 P A Q 1 Market Firm (b) Short-Run Response Quantity (firm)0 Price MC ATC Profit P 1 P 2 Quantity (market) Long-run supply Price 0 D 1 D 2 P 1 Q 1 Q 2 P 2 A B S 1 P 1 Firm (c) Long-Run Response Quantity (firm)0 Price MC ATC Market Quantity (market) Price 0 P 1 P 2 Q 1 Q 2 Long-run supply Q 3 C B D 1 D 2 S 1 A S 2 Figure 14-8

93 Firm (a) Initial Condition 0 Price Market Long-run supply Price 0 Demand, D 1 Short-run supply, S 1 P1P1 P MC ATC P1P1 P A Q1Q1 Figure 14-8a Quantity (market) Quantity (firm)

94 (b) Short-Run Response Figure 14-8b Market Firm Quantity (firm) 0 Price MC ATC Profit P1P1 P2P2 Quantity (market) Price 0 D 1 D 2 P1P1 Q1Q1 Q2Q2 P2P2 A B S 1 Long-run supply

95 (c) Long-Run Response Figure 14-8c P1P1 Firm 0 Price MC ATC Market Price 0 P1P1 P2P2 Q1Q1 Q2Q2 Long-run supply Q3Q3 C B D1D1 D2D2 S1S1 A S2S2 Quantity (firm) Quantity (market)


Download ppt "FIRMS IN COMPETITIVE MARKETS. Characteristics of Perfect Competition 1.There are many buyers and sellers in the market. 2.The goods offered by the various."

Similar presentations


Ads by Google