chap011-KJ

sizzledlickforkManagement

Oct 28, 2013 (3 years and 9 months ago)

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PURE

COMPETITION

Chapter 11

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11
-
5

A Perfectly Competitive
Market: Assumptions


Both buyers & sellers are “price takers”


Number of firms is large


No barriers to entry


Firms’ products are identical


Complete information


Firms are profit maximizers

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11
-
9

Supply Curves and Perfect
Competition


Supply




schedule of quantities of goods …


In PC market, a
firm’s

SC is its SRMC
above AVC.

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11
-
10

DCs and PC

Market supply

Market

Demand



1,000

3,000

Price

$10

8

6

4

2

0

Quantity

Market

Firm

Individual firm
demand


10

20

30

Price

$10

8

6

4

2

0

Quantity

2,00
0

A

B

C


Recall: Industry DC is


sloing.


In PC: Firm’s DC


Industry DC

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11
-
12

Relationship between

TR, AR & MR for PC firm




for
PC

firm,
MR = P


ie, P=AR=MR

P

Q

TR

MR

AR

$7

0

$0

-

$7

1

$7

$7

2

$14

$7

3

$21

$7

4

$28

$7

5

$35







$7

$7

$7

$7

$7

$7

$7

$7









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11
-
13

Profit Maximization: Max{TR

TC}

TC

TR

0

Total cost, revenue

$385

350

315

280

245

210

175

140

105

70

35

Quantity

1

2

3

4

5

6

7

8

9

Maximum profit =$81

$130

Loss

Loss

Profit

Tot. Profit =$45

MC = Slope
TC

MR = Slope
TR

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11
-
15

Marginal Cost, Marginal
Revenue, and Price

C

A

P = D = MR

Costs

1

2

3

4

5

6

7

8

9

10

Quantity

60

50

40

30

20

10

0

A

B

MC

0

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

35.00

35.00

35.00

35.00

35.00

35.00

35.00

35.00

35.00

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11
-
17

P=MR

Output

Total

Cost

Marginal


Cost

Average

Total Cost

Total

Revenue

Profit

TR
-
TC

-

0

$40

-

-

0

-
$40

$35

1

68

28

68

35

-
33

35

2

88

20

44

70

-
18

35

3

104

16

34.67

105

1

35

4

118

14

29.50

140

22

35

5

130

12

26

175

45

35

6

147

17

24.50

210

63

35

7

169

22

24.14

245

76

35

8

199

30

24.88

280

81

35

9

239

40

26.56

315

76

35

10

293

54

29.30

350

57

Finding

Profit

and

Loss

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11
-
18

B

Graphing Profits:

Max(




Posiive


Profit case (

㸰)


Zero ro晩琠case

Loss case

Quantity

Quantity

Quantity

Price

65

60

55

50

45

40

35

30

25

20

15

10

5

0

65

60

55

50

45

40

35

30

25

20

15

10

5

0

1


2


3


4


5


6


7


8


9


10


12

1


2


3


4


5


6


7


8


9


10


12

D

MC

A

P = MR

ATC

AVC

E

Profit

C

MC

ATC

AVC

MC

ATC

AVC

Loss

65

60

55

50

45

40

35

30

25

20

15

10

5

0

1


2


3


4


5


6

7

8

9

10

12

P = MR

P = MR

Price

Price

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11
-
19

The Shutdown Decision


Once invested in Fixed (sunk) costs…


TFC > 0 …


TC …


If
Produce
:


TFC > 0; what about TVC? Are they >,<, or = 0?


On revenue side: TR > 0


If
Shut
-
down
:



TC > 0, because …


Are TVC >,<, or = 0?


TR = 0 and


Shut
-
down rule…


Continue to operate in S/R, even if TC > TR, as
long as?


TR

TVC; implies what about averages?


P


䅖䌠†


oerae⁩f ⁐


AVC

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11
-
20

The Shutdown Decision

Example

Case 1

Case 2

TR

100

100

TVC

80

130

sunk = TFC


60

60

TC

140

190

Loss if shut down

Loss if operate

60

60

40

90

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11
-
21

The Shutdown Decision

MC

P = MR

2

4

6

8

Quantity

Price

60

50

40

30

20

10

0

ATC

AVC

Loss

A

$17.80

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11
-
23

550

0

Firm

Price

Quantity

Market

Quantity

Price

0

MC

AVC

20

5


7

D
1

D
0

17.80

6

25

650

750

S

No. of firms = 100





D
2



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11
-
25

Long
-
Run Competitive
Equilibrium

MC

P = MR

0

60

50

40

30

20

10

Price

2

4

6

8

Quantity

SRATC

LRATC

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11
-
30

Profit

Market Response to an
Increase in Demand

$9

10

12

0

Firm

Price

Quantity

B

A

Market

Quantity

Price

0

B

A

C

MC

AC

S
LR

S
0SR

7

700

$9

840


1,200

D
1

S
1SR

7

D
0