Lecture on Perfect Competition of the course introduction to microeconomics
- 1. CHAPTER ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©Sashkin/Shutterstock ECONOMICS Roger A. Arnold • Thirteenth Edition 22 PERFECT COMPETITION
- 2. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-1 The Theory of Perfect Competition 22-2 Perfect Competition in the Short Run 22-3 Perfect Competition in the Long Run 22-4 Topics for Analysis in the Theory of Perfect Competition 2
- 3. 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition 4. Oligopoly Market Structure Continuum Pure Competition Monopolistic Competition Oligopoly Pure Monopoly FOUR MARKET STRUCTURES 3
- 4. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-1 The Theory of Perfect Competition (1 of4) • Market Structure: The environment whose characteristics influence a firm’s pricing and output decisions • Perfect Competition: A theory of market structure based on four assumptions: (1) There are many sellers and buyers; (2) the sellers sell a homogenous good; (3) buyers and sellers have all relevant information; (4) entry into, and exit from, the market is easy • 22-1a A Perfectly Competitive Firm is a Price Taker • Price Taker: A seller that does not have the ability to control the price of the product it sells; the seller “takes” the price determined in the market 4
- 5. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-1 The Theory of Perfect Competition (2 of 4) • 22-1b The Demand Curve for a Perfectly Competitive Firm is Horizontal • Why Does a Perfectly Competitive Firm Sell at the Equilibrium Price? – If it tries to charge a price higher than the market- established equilibrium, it won’t sell any of its products – If the firm wants to maximize profits, it does not offer to sell at a lower price – See Exhibit 1 5
- 6. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock The Market Demand Curve and Firm Demand Curve in Perfect Competition 6 EXHIBIT 1
- 7. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-1 The Theory of Perfect Competition (3 of 4) • 22-1c Common Misconceptions about Demand Curves – Many think that all demand curves must be downward sloping, but this is not so – A single perfectly competitive firm’s supply is so small, compared with the total market supply, that the inverse relationship between price and quantity demanded cannot be observed on the firm’s level, only on the market level • 22-1d The Marginal Revenue Curve of a Perfectly Competitive Firm is the Same as Its Demand Curve – Marginal Revenue (MR): The change in total revenue (TR) that results from selling one additional unit of output (Q) – For a perfectly competitive firm, P = MR 7
- 8. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock The Demand Curve and the Marginal Revenue Curve for a Perfectly Competitive Firm 8 EXHIBIT 2
- 9. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-2 The Theory of Perfect Competition (1 of 6) • For the perfectly competitive firm, a price taker, price is equal to marginal revenue (P=MR), and therefore the firm’s demand curve is the same as its marginal revenue curve • This section discusses the amount of output the firm will produce in the short run • 22-2a What Level of Output Does the Profit- Maximizing Firm Produce? • Profit Maximization Rule: Profit is maximized by producing the quantity of output at which MR = MC • Exhibit 3 9
- 10. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock The Quantity of Output That the Perfectly Competitive Firm Will Produce 10 EXHIBIT 3
- 11. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-2 The Theory of Perfect Competition (2 of 6) • 22-2c To Produce or Not to Produce: That is the Question • Case 1. Price is Above Average Total Cost (Ex 4a) • Case 2. Price is Below Average Variable Cost (Ex 4b) • Case 3. Price is Below Average Total Cost but Above Average Variable Cost (Ex 4c) 11
- 12. MR=MC RULE –Firm produces the last unit of output for which MR > MC –It only applies if MR > AVC –It applies for all market structures –It is P=MC under perfect competition PROFIT MAXIMIZATION IN THE SHORT RUN: MARGINAL-REVENUE–MARGINAL-COST APPROACH 12
- 13. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 13 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 14. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 14 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 15. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 15 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 16. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 16 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 17. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 17 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 18. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 18 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 19. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 19 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 20. SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 20 (1) Total Product (Output) (2) Average Fixed Cost (AFC) (3) Average Variable Costs (AVC) (4) Average Total Cost (ATC) (5) Marginal Cost (MC) (5) Price = Marginal Revenue (MR) (6) Total Economic Profit (+) or Loss (-) 0 $-100 1 $100.00 $90.00 $190 $90 $131 -59 2 50.00 85.00 135 80 131 -8 3 33.33 80.00 113.33 70 131 +53 4 25.00 75.00 100.00 60 131 +124 5 20.00 74.00 94.00 70 131 +185 6 16.67 75.00 91.67 80 131 +236 7 14.29 77.14 91.43 90 131 +277 8 12.50 81.25 93.75 110 131 +298 9 11.11 86.67 97.78 130 131 +299 10 10.00 93.00 103.00 150 131 +280
- 21. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$131 SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 21
- 22. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$131 FIGURE 9.3 SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY MR = MC 22
- 23. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$131 SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY MR = MC 23
- 24. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$131 SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY MR = MC A=$97.78 24
- 25. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$131 SHORT-RUN PROFIT-MAXIMIZING FOR A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY MR = MC A=$97.78 Economic Profit 25
- 26. LOSS-MINIMIZING CASE ● Suppose the market price is $81 rather than $131. – Still produce because P > minAVC – This loss is less than FC – Losses at a minimum where MR=MC ● The profit-seeking producer should always compare MR (or price under PROFIT MAXIMIZATION IN THE SHORT RUN: MARGINAL-REVENUE–MARGINAL-COST APPROACH 26
- 27. SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY (1) Total product / output (2) Average fixed cost, AFC (3) Average variable cost, AVC (4) Average total cost, ATC (5) Marginal cost, MC (6) P=$81 marginal revenue, MR (7) Profit (+) or loss (–), $81 price (8) P=$71 marginal revenue, MR (9) Profit (+) or loss (–), $71 price 0 $– 100 $–100 1 $100.00 $90.00 $190.00 $ 90 $81 – 109 $71 –119 2 50.00 85.00 135.00 80 81 – 108 71 –128 3 33.33 80.00 113.33 70 81 – 97 71 –127 4 25.00 75.00 100.00 60 81 – 76 71 –116 5 20.00 74.00 94.00 70 81 – 65 71 –115 6 16.67 75.00 91.67 80 81 – 64 71 –124 7 14.29 77.14 91.43 90 81 – 73 71 –143 8 12.50 81.25 93.75 110 81 – 102 71 –182 9 11.11 86.67 97.78 130 81 – 151 71 –241 10 10.00 93.00 103.00 150 81 – 220 71 –320 27
- 28. SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY (1) Total product / output (2) Average fixed cost, AFC (3) Average variable cost, AVC (4) Average total cost, ATC (5) Marginal cost, MC (6) P=$81 marginal revenue, MR (7) Profit (+) or loss (–), $81 price (8) P=$71 marginal revenue, MR (9) Profit (+) or loss (–), $71 price 0 $– 100 $–100 1 $100.00 $90.00 $190.00 $ 90 $81 – 109 $71 –119 2 50.00 85.00 135.00 80 81 – 108 71 –128 3 33.33 80.00 113.33 70 81 – 97 71 –127 4 25.00 75.00 100.00 60 81 – 76 71 –116 5 20.00 74.00 94.00 70 81 – 65 71 –115 6 16.67 75.00 91.67 80 81 – 64 71 –124 7 14.29 77.14 91.43 90 81 – 73 71 –143 8 12.50 81.25 93.75 110 81 – 102 71 –182 9 11.11 86.67 97.78 130 81 – 151 71 –241 10 10.00 93.00 103.00 150 81 – 220 71 –320 28
- 29. SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY (1) Total product / output (2) Average fixed cost, AFC (3) Average variable cost, AVC (4) Average total cost, ATC (5) Marginal cost, MC (6) P=$81 marginal revenue, MR (7) Profit (+) or loss (–), $81 price (8) P=$71 marginal revenue, MR (9) Profit (+) or loss (–), $71 price 0 $– 100 $–100 1 $100.00 $90.00 $190.00 $ 90 $81 – 109 $71 –119 2 50.00 85.00 135.00 80 81 – 108 71 –128 3 33.33 80.00 113.33 70 81 – 97 71 –127 4 25.00 75.00 100.00 60 81 – 76 71 –116 5 20.00 74.00 94.00 70 81 – 65 71 –115 6 16.67 75.00 91.67 80 81 – 64 71 –124 7 14.29 77.14 91.43 90 81 – 73 71 –143 8 12.50 81.25 93.75 110 81 – 102 71 –182 9 11.11 86.67 97.78 130 81 – 151 71 –241 10 10.00 93.00 103.00 150 81 – 220 71 –320 29 Minimizing losses Do not shut down
- 30. SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY (1) Total product / output (2) Average fixed cost, AFC (3) Average variable cost, AVC (4) Average total cost, ATC (5) Marginal cost, MC (6) P=$81 marginal revenue, MR (7) Profit (+) or loss (–), $81 price (8) P=$71 marginal revenue, MR (9) Profit (+) or loss (–), $71 price 0 $– 100 $–100 1 $100.00 $90.00 $190.00 $ 90 $81 – 109 $71 –119 2 50.00 85.00 135.00 80 81 – 108 71 –128 3 33.33 80.00 113.33 70 81 – 97 71 –127 4 25.00 75.00 100.00 60 81 – 76 71 –116 5 20.00 74.00 94.00 70 81 – 65 71 –115 6 16.67 75.00 91.67 80 81 – 64 71 –124 7 14.29 77.14 91.43 90 81 – 73 71 –143 8 12.50 81.25 93.75 110 81 – 102 71 –182 9 11.11 86.67 97.78 130 81 – 151 71 –241 10 10.00 93.00 103.00 150 81 – 220 71 –320 30
- 31. SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY (1) Total product / output (2) Average fixed cost, AFC (3) Average variable cost, AVC (4) Average total cost, ATC (5) Marginal cost, MC (6) P=$81 marginal revenue, MR (7) Profit (+) or loss (–), $81 price (8) P=$71 marginal revenue, MR (9) Profit (+) or loss (–), $71 price 0 $– 100 $–100 1 $100.00 $90.00 $190.00 $ 90 $81 – 109 $71 –119 2 50.00 85.00 135.00 80 81 – 108 71 –128 3 33.33 80.00 113.33 70 81 – 97 71 –127 4 25.00 75.00 100.00 60 81 – 76 71 –116 5 20.00 74.00 94.00 70 81 – 65 71 –115 6 16.67 75.00 91.67 80 81 – 64 71 –124 7 14.29 77.14 91.43 90 81 – 73 71 –143 8 12.50 81.25 93.75 110 81 – 102 71 –182 9 11.11 86.67 97.78 130 81 – 151 71 –241 10 10.00 93.00 103.00 150 81 – 220 71 –320 31
- 32. SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY (1) Total product / output (2) Average fixed cost, AFC (3) Average variable cost, AVC (4) Average total cost, ATC (5) Marginal cost, MC (6) P=$81 marginal revenue, MR (7) Profit (+) or loss (–), $81 price (8) P=$71 marginal revenue, MR (9) Profit (+) or loss (–), $71 price 0 $– 100 $–100 1 $100.00 $90.00 $190.00 $ 90 $81 – 109 $71 –119 2 50.00 85.00 135.00 80 81 – 108 71 –128 3 33.33 80.00 113.33 70 81 – 97 71 –127 4 25.00 75.00 100.00 60 81 – 76 71 –116 5 20.00 74.00 94.00 70 81 – 65 71 –115 6 16.67 75.00 91.67 80 81 – 64 71 –124 7 14.29 77.14 91.43 90 81 – 73 71 –143 8 12.50 81.25 93.75 110 81 – 102 71 –182 9 11.11 86.67 97.78 130 81 – 151 71 –241 10 10.00 93.00 103.00 150 81 – 220 71 –320 32 NOT minimizing losses
- 33. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 33
- 34. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 34
- 35. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$81 A=$91.67 V = $75 SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 35
- 36. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output Loss MR = P MC AVC ATC P=$81 A=$91.67 V = $75 SHORT-RUN LOSS-MINIMIZING POSITION OF A FIRM IN A PERFECTLY COMPETITIVE INDUSTRY 36
- 37. Cost and Revenue $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MR = P MC AVC ATC P=$71 V = $74 Short-Run Shut Down Point P < Minimum AVC $71 < $74 THE SHORT-RUN SHUTDOWN POSITION OF A FIRM IN PERFECT COMPETITION 37
- 38. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock Profit Maximization and Loss Minimization for the Perfectly Competitive Firm: Three Cases 38 EXHIBIT 4
- 39. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-2 The Theory of Perfect Competition (4 of 6) • 22-2d Common Misconceptions over the Shutdown Decision (cont) 39
- 40. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock What Should a Perfectly Competitive Firm Do in the Short Run? 40 EXHIBIT 5
- 41. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock Q&A about Perfect Competition 41 EXHIBIT 6
- 42. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock 22-2 The Theory of Perfect Competition (5 of 6) • 22-2e The Perfectly Competitive Firm’s Short-Run Supply Curve • Short-Run (Firm) Supply Curve: The portion of the firm’s marginal cost curve that lies above the average variable cost curve • Short-Run Market (Industry) Supply Curve: The horizontal sum of all existing firms’ short-run supply curves 42
- 43. ● Firm’s short-run supply curve is the portion of its MC curve above minimum AVC – Firm will not produce at prices below its minimum AVC – Quantity supplied increases as price increases – Economic profit is higher at higher prices – The P=MC rule is the key MARGINAL COST AND SHORT-RUN SUPPLY 43
- 44. Price Quantity Supplied Maximum Profit (+) Minimum Loss (-) $151 10 $+480 131 9 +299 111 8 +138 91 7 -3 81 6 -64 71 0 -100 61 0 -100 THE SUPPLY SCHEDULE OF A COMPETITIVE FIRM WITH THE COST DATA IN FIGURE 9-3 44
- 45. P1 0 Cost and Revenues (Dollars) Quantity Supplied MR1 P2 MR2 P3 MR3 P4 MR4 P5 MR5 MC AVC ATC Q2 Q3 Q4 Q5 a b c d e THE P=MC RULE AND THE COMPETITIVE FIRM’S SHORT-RUN SUPPLY CURVE 45
- 46. P1 0 Cost and Revenues (Dollars) Quantity Supplied MR1 P2 MR2 P3 MR3 P4 MR4 P5 MR5 MC AVC ATC Q2 Q3 Q4 Q5 a b c d e THE P=MC RULE AND THE COMPETITIVE FIRM’S SHORT-RUN SUPPLY CURVE Break-even point (normal profit) 46
- 47. P1 0 Cost and Revenues (Dollars) Quantity Supplied MR1 P2 MR2 P3 MR3 P4 MR4 P5 MR5 MC AVC ATC Q2 Q3 Q4 Q5 a b c d e THE P=MC RULE AND THE COMPETITIVE FIRM’S SHORT-RUN SUPPLY CURVE Shutdown point (if P is below) Break-even point (normal profit) 47
- 48. ©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock The Perfectly Competitive Firm’s Short-Run Supply Curve 48 EXHIBIT 7
Editor's Notes
- #3: We will be discussing all four of these market models, but first we will start with pure competition. From the continuum, you can see that we are starting at one extreme of the possible market models. The other market models will be discussed in future chapters.
- #13: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #14: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #15: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #16: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #17: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #18: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #19: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #20: Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, or where MR=MC. At the tenth unit MC exceeds MR. Therefore, the firm should produce only nine units to maximize profits.
- #21: Figure 8.3 shows the short-run profit maximization for a purely competitive firm. The MR=MC output enables the purely competitive firm to maximize profits or to minimize losses. In this case, MR (=P in pure competition) and MC are equal at an output, Q, of 9 units. At this output, P equals $131 and exceeds the average total cost, and A = $97.78, so the firm realizes an economic profit of P - A per unit. The total economic profit is represented by the green rectangle and is (Price - ATC) * 9.
- #22: Figure 8.3 shows the short-run profit maximization for a purely competitive firm. The MR=MC output enables the purely competitive firm to maximize profits or to minimize losses. In this case, MR (=P in pure competition) and MC are equal at an output, Q, of 9 units. At this output, P equals $131 and exceeds the average total cost, and A = $97.78, so the firm realizes an economic profit of P - A per unit. The total economic profit is represented by the green rectangle and is (Price - ATC) * 9.
- #23: Figure 8.3 shows the short-run profit maximization for a purely competitive firm. The MR=MC output enables the purely competitive firm to maximize profits or to minimize losses. In this case, MR (=P in pure competition) and MC are equal at an output, Q, of 9 units. At this output, P equals $131 and exceeds the average total cost, and A = $97.78, so the firm realizes an economic profit of P - A per unit. The total economic profit is represented by the green rectangle and is (Price - ATC) * 9.
- #24: Figure 8.3 shows the short-run profit maximization for a purely competitive firm. The MR=MC output enables the purely competitive firm to maximize profits or to minimize losses. In this case, MR (=P in pure competition) and MC are equal at an output, Q, of 9 units. At this output, P equals $131 and exceeds the average total cost, and A = $97.78, so the firm realizes an economic profit of P - A per unit. The total economic profit is represented by the green rectangle and is (Price - ATC) * 9.
- #25: Figure 8.3 shows the short-run profit maximization for a purely competitive firm. The MR=MC output enables the purely competitive firm to maximize profits or to minimize losses. In this case, MR (=P in pure competition) and MC are equal at an output, Q, of 9 units. At this output, P equals $131 and exceeds the average total cost, and A = $97.78, so the firm realizes an economic profit of P - A per unit. The total economic profit is represented by the green rectangle and is (Price - ATC) * 9.
- #26: In the short run the firm only has two choices: produce or shut-down. There is not enough time in the short run for the firm to get out of business. Given these options, sometimes the firm will produce, but still make a loss. In these situations, the loss from producing is smaller than the loss if the firm shut-down so this is the firm’s best choice.
- #27: Click on P=$81 to go to the related graph (Slide 17) Click on P=$71 to go to the related graph (Slide 18)
- #28: Click on P=$81 to go to the related graph (Slide 17) Click on P=$71 to go to the related graph (Slide 18)
- #29: Click on P=$81 to go to the related graph (Slide 17) Click on P=$71 to go to the related graph (Slide 18)
- #30: Click on P=$81 to go to the related graph (Slide 17) Click on P=$71 to go to the related graph (Slide 18)
- #31: Click on P=$81 to go to the related graph (Slide 17) Click on P=$71 to go to the related graph (Slide 18)
- #32: Click on P=$81 to go to the related graph (Slide 17) Click on P=$71 to go to the related graph (Slide 18)
- #33: Figure 9.4 shows the short-run loss minimization for a purely competitive firm. If price, P, exceeds the minimum AVC (here $74 at Q = 5) but is less than ATC at the MR = MC output (here 6 units) then the firm will earn losses, but it will produce. In this instance the loss is P - A per unit, where A is the average total cost at 6 units of output and price equals $81. The total loss is shown by the red area and is equal to (P–ATC)*6. Click on the arrow to go back to slide 16.
- #34: Figure 9.4 shows the short-run loss minimization for a purely competitive firm. If price, P, exceeds the minimum AVC (here $74 at Q = 5) but is less than ATC at the MR = MC output (here 6 units) then the firm will earn losses, but it will produce. In this instance the loss is P - A per unit, where A is the average total cost at 6 units of output and price equals $81. The total loss is shown by the red area and is equal to (P–ATC)*6. Click on the arrow to go back to slide 16.
- #35: Figure 9.4 shows the short-run loss minimization for a purely competitive firm. If price, P, exceeds the minimum AVC (here $74 at Q = 5) but is less than ATC at the MR = MC output (here 6 units) then the firm will earn losses, but it will produce. In this instance the loss is P - A per unit, where A is the average total cost at 6 units of output and price equals $81. The total loss is shown by the red area and is equal to (P–ATC)*6. Click on the arrow to go back to slide 16.
- #36: Figure 9.4 shows the short-run loss minimization for a purely competitive firm. If price, P, exceeds the minimum AVC (here $74 at Q = 5) but is less than ATC at the MR = MC output (here 6 units) then the firm will earn losses, but it will produce. In this instance the loss is P - A per unit, where A is the average total cost at 6 units of output and price equals $81. The total loss is shown by the red area and is equal to (P–ATC)*6. Click on the arrow to go back to slide 16.
- #37: This graph shows the short-run shutdown case for a purely competitive firm. If price, P (here equal to $71), falls below the minimum AVC (here $74 at Q = 5), the competitive firm will minimize its losses in the short run by shutting down. There is no level of output at which the firm can produce and incur a loss smaller than its total fixed cost. In other words, the $100 fixed cost is the minimum possible loss. Click on the arrow to go back to slide 16. Click anywhere else to go to slide 19.
- #44: There is a relationship between price and quantity supplied. Since P=MR for the competitive firm, the profit maximization rule MR=MC will yield the short run supply curve. The short run supply curve is the part of the MC that lies above the AVC curve. The schedule shows the quantity a firm will produce at a variety of prices
- #45: The schedule shows the quantity a firm will produce at a variety of prices. Firms continue to follow the profit-maximizing rule and produce where MR=MC. They will produce as long as the price is greater than the minAVC.
- #46: The schedule shows the quantity a firm will produce at a variety of prices. Firms continue to follow the profit-maximizing rule and produce where MR=MC. They will produce as long as the price is greater than the minAVC.
- #47: The schedule shows the quantity a firm will produce at a variety of prices. Firms continue to follow the profit-maximizing rule and produce where MR=MC. They will produce as long as the price is greater than the minAVC.