2010_L Perfect Competition
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Transcript of 2010_L Perfect Competition
Perfect Competition
Mr. Green’s Economics 2010
Dixie State College
Economics 2010 Home Page
Equal Opportunity Costs Suppose Mr. A is equally skilled at
two jobs: producing milk or selling insurance.
Suppose Mr. A is indifferent in his preference between selling insurance and producing milk.
Suppose his accountant tells him that his profit if he chooses to sell insurance will be $100,000 and his profit if he chooses to produce milk will also be $100,000.
Accounting Profit
The costs that are counted by accountants are the costs of the factors of production: rents, wages, interest
Revenue – Cost = Normal or Accounting Profit
Economists call these accounting costs Explicit Costs
Revenue – Explicit Costs = Normal or Accounting Profit
Divergent Opportunity Costs Suppose Mr. A is selling insurance
and earning $100,000 per year, and
Suppose demand for milk increases so that yearly profits in milk production rise to $120,000.
The opportunity cost (or implicit cost) of remaining is the insurance business is . . . .?
$20,000.
Economic Profit Normal or Accounting Profit =
Revenue – Explicit Costs Economic Profit = (Normal Profit in
Industry A) – (Normal Profit in Industry B)
Economic Profit = the Opportunity Cost(s) of Working in Industry A when compared to Industry B.
Industrial Organization Continuum: Degree of Competition
Perfect Competition
MonopolyOligopolyMonopolistic Competition
Many Firms One Firm
No Barriers to Entry Significant Barriers to Entry
Homogenous Product
Differentiated Product
Number of Firms Many small firms; therefore, no
single firm can effect the price. This makes the firms are price takers.
Only a few firms or one firm. therefore, each will have power to set or influence prices.
This makes the firms are price makers.
Homogenous Product If there is no difference between
the product(s) of one producer and those of another producer, the product is homogenous.
If the product(s) of one producer and those of another producer can be differentiated, the product is not homogenous.
Barriers to Entry and Exit Money? Expertise Sole Ownership
of a Resource Economies of
Scale
Network Barriers Patents and
Copyrights Licenses,
Regulations, Taxes, etc.
Market Structure
Perfect Competition
Monopolistic Competition Oligopoly Monopoly
# of Suppliers?
Homogenous Product?
Barriers to Entry and Exit?
Homogenous Product
Differentiated Product
Differentiated Product
No Barriers Brand Name Barriers
Economies of Scale Barriers
Significant Barriers
Many Sellers Many Sellers Few Sellers One Seller
Perfect Competition
Perfect Competition
Monopolistic Competition Oligopoly Monopoly
# of Suppliers?
Homogenous Product?
Barriers to Entry and Exit?
Homogenous Product
No Barriers
Price Takers
Many Sellers
The Price Taker Assumption
P
Qmilk
S
D
Qe
$6
P
Qmilk
D
Market Supply and Demand
Contented Cow Dairy’s Demand
Marginal Revenue
TR
0
1
2
3
4
5
6
7
6
6
6
6
6
6
6
6
0
6
12
18
24
30
36
42
6
6
6
6
6
MRQ P
6
6
Demand = Marginal Revenue
P
Qmilk
S
D
Qe
$6P = D = MR
P
Qmilk
Market Supply and Demand
Contented Cow Dairy’s Demand
Marginal Cost
AVC
Quantity
Cost or
Price
AFC
ATC
Quantity
Cost or
Price
AFC
AVCATC
MC
MC
Profit Maximization
P
Qmilk
$6P = D = MR
MC
2
$4
1
$3
Profit Maximization
P
Qmilk
$6P = D = MR
MC
2
$4$5
3
Profit Maximization
P
Qmilk
$6P = D = MR
MC
2
$4$5
3 5
$7
4
Profit Maximization
P
Qmilk
$6P = D = MR
MC
2
$4$5
3 4 5
$7
Profit Maximization
4 pounds of milk maximizes profit because at MR = MC the producer gets the most possible additional profit without incurring any loss.
Production in Perfect Competition Short Run
The Short-Run Shut-Down PointDerivation of the Supply Curve
Long RunProfit, Loss, and the Zero Profit
EquilibriumLong Run Supply Curve
Total Revenue
The Short Run Shut-Down Point
Quantity
Cost or Price
AVC
D=MR0
Q0
P0
P1
P2
P3
ATC
MC
Total Variable Cost
Total Revenue
Remaining Total Variable Cost
Total Fixed Cost
Result
At MR0, Average Variable Cost > Marginal Revenue and Rational Firms will Shut-Down
The Short Run Shut-Down Point
Quantity
Cost or Price
AVC
D=MR0
D=MR1
D=MR3
Q2
P0
P1
D=MR2P2
P3
MC
ATC
Total RevenueTotal Variable Cost
Total Fixed CostRemaining Total Revenue
Remaining Total Fixed Cost
Result
At MR0, Average Variable Cost > Marginal Revenue and Rational Firms will Shut-Down
At MR2, Average Variable Cost < Marginal Revenue and Rational Firms will Stay Active
The Short Run Shut-Down Point
Quantity
Cost or Price
D=MR0
D=MR2
D=MR3
Q1
P0
P2
P3
AVCATC
D=MR1P1
MC
Total RevenueAverage Variable Costs
Average Fixed Cost
Total Revenue
Result
At MR0, Average Variable Cost > Marginal Revenue and Rational Firms will Shut-Down
At MR1, Average Variable Cost = Marginal Revenue and Rational Firms can either Shut-Down or Stay Active.
At MR2, Average Variable Cost < Marginal Revenue and Rational Firms will Stay Active
The Short Run Shut-Down Point
Quantity
Cost or Price
AVC
D=MR1
Shut Down Point: AVC = MR
ATC
MC
P1
The Supply Curve
Quantity
Cost or Price
AVC
D=MR0
D=MR1
D=MR2
D=MR3
Q1 Q2Q3
P0
P1
P2
P3
= SupplyMC
ATC
Dynamics of a Price Increase
Qmilk
Cost or
PriceATC
MC
Individual Milk Producing Firm
MR1
MarketP1
Price
Quantity
Market for Milk
S
D1
Market
Q1
Q1
MR3MarketP3
D2
Market
Q3
Q3
Total RevenueTotal Cost
Qmilk
Cost or Price ATC
MC
Q3
Economic Profit
P3MR3
Economic Profit
The Opportunity Cost Suppose Mr. A is selling insurance
and earning $100,000 per year. According to the graph, there are
economic profits in milk. Assume these economic profits = $20,000.
Mr. A can earn $100,000 in insurance or $120,000 by switching to milk. The opportunity cost of staying in insurance is $20,000.
Economic Profit If there is easy entry, economic
profit will act like a magnet. People with the expertise and the
inclination to produce milk enter the milk industry.
These new suppliers will bid down the price.
Suppliers will continue to enter until there is no magnet.
Attraction of Profits
Qmilk
Cost or
Price ATC MC
Quantity
Price
S1
D1
Market for Milk Individual Milk Producing Firm
D2
Market
Q2
MR3
S2
Market
Q1
Q2
MR1
MarketP1
MarketP3MR2MarketP2
Total RevenueTotal Cost
Qmilk
Cost or Price ATC
MC
Economic Profit
Q2
P2MR2Economic Profit
P3MR3
Attraction of Profits
Qmilk
Cost or
Price ATC MC
Quantity
Price
S1
D1
Market for Milk Individual Milk Producing Firm
D2
MP3
MR3S2
Q1MQ4MQ1
MR1
MP1
MQ3 Q3
Competitive Equilibrium
MR = ATC Economic Profit = 0
Total RevenueTotal Cost
Qmilk
Cost or Price
ATC
MC
Competitive Equilibrium
Q1
ATC = MR Economic Profit = 0
MR1P1
Dynamics of a Price Decrease
Qmilk
Cost or Price ATC
MC
Individual Milk Producing Firm
MR1MarketP1
Price
Quantity
Market for Milk
S
D2
Market
Q1
Q1
MR3MarketP3
D1
Market
Q3
Q3
Total Revenue
Total Cost
Qmilk
Cost or Price ATC
MC
Q3
P3MR3
Economic Loss
P1 MR1Economic Loss
The Opportunity Cost Suppose Mr. A is earning $80,000 a
year producing milk. Suppose Mr. A could earn $100,000
selling insurance. The opportunity cost of staying in
milk production is $20,000. The economic loss shown on the graph is $20,000.
Economic Loss If there is easy exit, economic loss
will repulse milk producers. They will exit the milk industry for
other more profitable pursuits. This loss of suppliers will bid up the
price. Suppliers will continue to exit until
the repulsion ends.
Repulsion of Loss
Qmilk
Cost or Price ATC
MC
Individual Milk Producing Firm
MR1MP1
Price
Quantity
Market for Milk
D2
MQ2Q1
MR3MP3
D1
MQ3Q3
S1
S2
MP2MR2
Q2MQ1
P3MR3
Total ProfitTotal Cost
Qmilk
Cost or Price
ATC
MC
Q3
Economic Loss
P2MR2
Q2
Economic Loss
Repulsion of Loss
Qmilk
Cost or Price ATC
MC
Individual Milk Producing Firm
MR1MP1
Price
Quantity
Market for Milk
D2
MQ4Q1
MR3MP3
D1
MQ3Q3
S1
S2
Q2MQ1
Competitive Equilibrium
MR = ATC Economic Loss = 0
Total RevenueTotal Cost
Qmilk
Cost or Price
ATC
MC
Competitive Equilibrium
Q1
ATC = MR Economic Loss = 0
MR1P1
Perfect Competition
Perfect Competition
Monopolistic Competition Oligopoly Monopoly
# of Suppliers?
Homogenous Product?
Barriers to Entry and Exit?
Homogenous Product
No Barriers
Price Takers
Many Sellers
Zero Economic
Profit or Loss
Long Run Supply Curve
Quantity
Price
S1
D1
Market for Milk
D2
P2
Q3
S2
Q4Q1
P1 Long Run Supply Curve
The End