Description
This is a presentation describing perfect competition with the help of graphs and charts.
MARKET STRUCTURE
PERFECT MONOPOLISTI CHARACTERISTI COMPETITIO C OLIGOPOLY C N COMPETITION MONOPOLY
Number of firms
Type of product Ease of entry Examples of industries
Many
Identical High • Wheat • Apples
Many
Differentiated High
Few
Identical or differentiated Low
One
Unique Entry blocked • First-class mail delivery • Tap water
2
• Selling DVDs • Manufacturing • Restaurants computers • Manufacturing automobiles
The Competitive Market for Microsoft Stock ? The software market has long been dominated by the Microsoft Corporation. Chairman Bill Gates is one of the few corporate executives who is well-known on Main Street as well as Wall Street. But unlike its software, shares of Microsoft’s common stock are sold in a competitive market. Over 60 million shares of Microsoft stock, out of over 10 billion shares outstanding, were sold every business day in 2005. ? Since each share is exactly the same as any other, the thousands of buyers and sellers of the stock were “price takers.” On a given day, they all must accept the stock price established by the market given. In June 2005, this price was about $25 per share. ? Sources: http://microsoft.com/msft/ and The Wall Street Journal, June 24, 2005.
3
• Perfectly competitive market • Assumptions A market that meets the conditions of (1)many buyers and sellers, (2) all firms selling identical products, (3) no barriers to new firms entering the market (4) Profit maximization (5) No government regulation Pure Competition Perfect mobility Perfect Knowledge
4
• A Perfectly Competitive Firm Cannot Affect the Market Price
•
Price taker A buyer or seller that is unable to affect the market price.
A Perfectly Competitive Firm Faces a Horizontal Demand Curve
5
2 LEARNING OBJECTIVE
•
•
Profit Total revenue minus total cost. Profit = TR - TC
Don’t Confuse the Demand Curve for Farmer Douglas’s Wheat with the Market Demand Curve for Wheat
6
• Revenue for a Firm in a Perfectly Competitive Market
•
Average revenue (AR) Total revenue divided by the number of units sold.
AR ? TR Q
so, AR ?
TR P ? Q ? ?P Q Q
• Marginal revenue (MR) Change in total revenue from selling one more unit.
Change in total revenue ?TR Marginal Revenue ? , or MR ? Change in quantity ?Q
7
• Revenue for a Firm in a Perfectly Competitive Market
NUMBER OF BUSHELS (Q) MARKET PRICE (PER BUSHEL) (P) TOTAL REVENUE (TR) AVERAGE REVENUE (AR) MARGINAL REVENUE (MR)
0 1 2 3 4 5 6 7 8 9 10
$4 4 4 4 4 4 4 4 4 4 4
$0 4 8 12 16 20 24 28 32 36 40
$4 4 4 4 4 4 4 4 4 4
$4 4 4 4 4 4 4 4 4 4
8
• Revenue for a Firm in a Perfectly Competitive Market
QUANTITY (BUSHELS) (Q)
0 1 2 3 4 5 6 7 8 9 10
TOTAL REVENUE (TR)
$0.00 4.00 8.00 12.00 16.00 20.00 24.00 28.00 32.00 36.00 40.00
TOTAL COSTS (TC)
$1.00 4.00 6.00 7.50 9.50 12.00 15.00 19.50 25.50 32.50 40.50
PROFIT (TR-TC)
-$1.00 0.00 2.00 4.50 6.50 8.00 9.00 8.50 6.50 3.50 -0.50
MARGINAL MARGINAL REVENUE COST (MR) (MC)
$4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 $3.00 2.00 1.50 2.00 2.50 3.00 4.50 6.00 7.00 8.00
9
The Profit-Maximizing Level of Output
10
3 LEARNING OBJECTIVE
• Profit = (P x Q) ? TC
TC ( P ? Q) Profit ? ? Q Q Q
• Or
Profit ? P ? ATC , Q
• Profit = (P ? ATC)Q
11
• Showing a Profit on the Graph
12
?
Determining Profit-Maximizing Price and Quantity
OUTPU T PER DAY 0 1 2 3 4 5 6 7 8 9
TOTA L COST $1.00 1.50 1.75 2.25 3.00 4.00 5.25 6.75 8.50 10.50
MARGIN AL COST $0.50 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00
13
• Illustrating When a Firm Is Breaking Even or Operating at a Loss
? P > ATC, which means the firm makes a profit ? P = ATC, which means the firm breaks even (its total cost equals it total revenue) ? P < ATC, which means the firm experiences losses
14
Remember that Firms Maximize Total Profit, Not Profit per Unit
15
?Losing
Money in the Medical Screening Industry
•Providing preventive medical scans turned out not to be a profitable business.
16
4 LEARNING OBJECTIVE
• In the short run a firm suffering losses has two choices:
? Continue to produce
? Stop production by shutting down temporarily
• Sunk cost A cost that has already been paid and that cannot be recovered.
17
• The Supply Curve of the Firm in the Short Run
Shutdown point The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.
18
5 LEARNING OBJECTIVE
• Economic Profit and the Entry or Exit Decision
19
• Economic Profit and the Entry or Exit Decision
• •
Economic profit A firm’s revenues minus all its costs, implicit and explicit. Economic loss The situation in which a firm’s total revenue is less than its total cost, including all implicit costs.
20
• Economic Profit and the Entry or Exit Decision
EXPLICIT COSTS
Water Wages Organic fertilizer Electricity Payment on bank loan IMPLICIT COSTS Foregone salary $30,000 Opportunity cost of the $100,000 she has invested in her $10,000 farm Total Cost $125,000
21
$25,000 $35,000 $14,000 $5,000 $6,000
• Economic Profit and the Entry or Exit Decision
• ECONOMIC PROFIT LEADS TO ENTRY OF NEW FIRMS
The Effect of Entry on Economic Profits
22
• Economic Profit and the Entry or Exit Decision
• ECONOMIC LOSSES LEAD TO EXIT OF FIRMS
23
• Economic Profit and the Entry or Exit Decision
• ECONOMIC LOSSES LEAD TO EXIT OF FIRMS
The Effect of Exit on Economic Losses (cont’d.)
24
• Long-Run Equilibrium in a Perfectly Competitive Market Long-run competitive equilibrium •
The situation in which the entry and exit of firms have resulted in the typical firm just breaking even.
25
• The Long-Run Supply Curve in a Perfectly Competitive Market
•Long-run supply curve A curve showing the relationship in the long run between market price and the quantity supplied.
26
• The Long-Run Supply Curve in a Perfectly Competitive Market
27
6 LEARNING OBJECTIVE
•Productive Efficiency
Productive efficiency The situation in which a good or service is produced at the lowest possible cost.
28
?
How Productive Efficiency Benefits Consumers
29
• Allocative Efficiency •Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them:
? The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold. ? Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. ? Therefore, firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
30
• Allocative Efficiency
?
Allocative efficiency A state of the economy in which production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
31
doc_251301992.pptx
This is a presentation describing perfect competition with the help of graphs and charts.
MARKET STRUCTURE
PERFECT MONOPOLISTI CHARACTERISTI COMPETITIO C OLIGOPOLY C N COMPETITION MONOPOLY
Number of firms
Type of product Ease of entry Examples of industries
Many
Identical High • Wheat • Apples
Many
Differentiated High
Few
Identical or differentiated Low
One
Unique Entry blocked • First-class mail delivery • Tap water
2
• Selling DVDs • Manufacturing • Restaurants computers • Manufacturing automobiles
The Competitive Market for Microsoft Stock ? The software market has long been dominated by the Microsoft Corporation. Chairman Bill Gates is one of the few corporate executives who is well-known on Main Street as well as Wall Street. But unlike its software, shares of Microsoft’s common stock are sold in a competitive market. Over 60 million shares of Microsoft stock, out of over 10 billion shares outstanding, were sold every business day in 2005. ? Since each share is exactly the same as any other, the thousands of buyers and sellers of the stock were “price takers.” On a given day, they all must accept the stock price established by the market given. In June 2005, this price was about $25 per share. ? Sources: http://microsoft.com/msft/ and The Wall Street Journal, June 24, 2005.
3
• Perfectly competitive market • Assumptions A market that meets the conditions of (1)many buyers and sellers, (2) all firms selling identical products, (3) no barriers to new firms entering the market (4) Profit maximization (5) No government regulation Pure Competition Perfect mobility Perfect Knowledge
4
• A Perfectly Competitive Firm Cannot Affect the Market Price
•
Price taker A buyer or seller that is unable to affect the market price.
A Perfectly Competitive Firm Faces a Horizontal Demand Curve
5
2 LEARNING OBJECTIVE
•
•
Profit Total revenue minus total cost. Profit = TR - TC
Don’t Confuse the Demand Curve for Farmer Douglas’s Wheat with the Market Demand Curve for Wheat
6
• Revenue for a Firm in a Perfectly Competitive Market
•
Average revenue (AR) Total revenue divided by the number of units sold.
AR ? TR Q
so, AR ?
TR P ? Q ? ?P Q Q
• Marginal revenue (MR) Change in total revenue from selling one more unit.
Change in total revenue ?TR Marginal Revenue ? , or MR ? Change in quantity ?Q
7
• Revenue for a Firm in a Perfectly Competitive Market
NUMBER OF BUSHELS (Q) MARKET PRICE (PER BUSHEL) (P) TOTAL REVENUE (TR) AVERAGE REVENUE (AR) MARGINAL REVENUE (MR)
0 1 2 3 4 5 6 7 8 9 10
$4 4 4 4 4 4 4 4 4 4 4
$0 4 8 12 16 20 24 28 32 36 40
$4 4 4 4 4 4 4 4 4 4
$4 4 4 4 4 4 4 4 4 4
8
• Revenue for a Firm in a Perfectly Competitive Market
QUANTITY (BUSHELS) (Q)
0 1 2 3 4 5 6 7 8 9 10
TOTAL REVENUE (TR)
$0.00 4.00 8.00 12.00 16.00 20.00 24.00 28.00 32.00 36.00 40.00
TOTAL COSTS (TC)
$1.00 4.00 6.00 7.50 9.50 12.00 15.00 19.50 25.50 32.50 40.50
PROFIT (TR-TC)
-$1.00 0.00 2.00 4.50 6.50 8.00 9.00 8.50 6.50 3.50 -0.50
MARGINAL MARGINAL REVENUE COST (MR) (MC)
$4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 $3.00 2.00 1.50 2.00 2.50 3.00 4.50 6.00 7.00 8.00
9
The Profit-Maximizing Level of Output
10
3 LEARNING OBJECTIVE
• Profit = (P x Q) ? TC
TC ( P ? Q) Profit ? ? Q Q Q
• Or
Profit ? P ? ATC , Q
• Profit = (P ? ATC)Q
11
• Showing a Profit on the Graph
12
?
Determining Profit-Maximizing Price and Quantity
OUTPU T PER DAY 0 1 2 3 4 5 6 7 8 9
TOTA L COST $1.00 1.50 1.75 2.25 3.00 4.00 5.25 6.75 8.50 10.50
MARGIN AL COST $0.50 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00
13
• Illustrating When a Firm Is Breaking Even or Operating at a Loss
? P > ATC, which means the firm makes a profit ? P = ATC, which means the firm breaks even (its total cost equals it total revenue) ? P < ATC, which means the firm experiences losses
14
Remember that Firms Maximize Total Profit, Not Profit per Unit
15
?Losing
Money in the Medical Screening Industry
•Providing preventive medical scans turned out not to be a profitable business.
16
4 LEARNING OBJECTIVE
• In the short run a firm suffering losses has two choices:
? Continue to produce
? Stop production by shutting down temporarily
• Sunk cost A cost that has already been paid and that cannot be recovered.
17
• The Supply Curve of the Firm in the Short Run
Shutdown point The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.
18
5 LEARNING OBJECTIVE
• Economic Profit and the Entry or Exit Decision
19
• Economic Profit and the Entry or Exit Decision
• •
Economic profit A firm’s revenues minus all its costs, implicit and explicit. Economic loss The situation in which a firm’s total revenue is less than its total cost, including all implicit costs.
20
• Economic Profit and the Entry or Exit Decision
EXPLICIT COSTS
Water Wages Organic fertilizer Electricity Payment on bank loan IMPLICIT COSTS Foregone salary $30,000 Opportunity cost of the $100,000 she has invested in her $10,000 farm Total Cost $125,000
21
$25,000 $35,000 $14,000 $5,000 $6,000
• Economic Profit and the Entry or Exit Decision
• ECONOMIC PROFIT LEADS TO ENTRY OF NEW FIRMS
The Effect of Entry on Economic Profits
22
• Economic Profit and the Entry or Exit Decision
• ECONOMIC LOSSES LEAD TO EXIT OF FIRMS
23
• Economic Profit and the Entry or Exit Decision
• ECONOMIC LOSSES LEAD TO EXIT OF FIRMS
The Effect of Exit on Economic Losses (cont’d.)
24
• Long-Run Equilibrium in a Perfectly Competitive Market Long-run competitive equilibrium •
The situation in which the entry and exit of firms have resulted in the typical firm just breaking even.
25
• The Long-Run Supply Curve in a Perfectly Competitive Market
•Long-run supply curve A curve showing the relationship in the long run between market price and the quantity supplied.
26
• The Long-Run Supply Curve in a Perfectly Competitive Market
27
6 LEARNING OBJECTIVE
•Productive Efficiency
Productive efficiency The situation in which a good or service is produced at the lowest possible cost.
28
?
How Productive Efficiency Benefits Consumers
29
• Allocative Efficiency •Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them:
? The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold. ? Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. ? Therefore, firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
30
• Allocative Efficiency
?
Allocative efficiency A state of the economy in which production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
31
doc_251301992.pptx