Competitive Markets
36
Competitive Markets
description
Competitive Markets. Structure. Fragmented Undifferentiated Products : Homogeneous Perfect Information about Price Equal Access to Resources. Three Implication. Price Takers Law of one Price Free Entry & Free Exit. Profit Maximization. Profit Maximization Condition. TR. TR,TC. TC. - PowerPoint PPT Presentation
Transcript of Competitive Markets
Competitive MarketsCompetitive Markets
Structure
• Fragmented
• Undifferentiated Products : Homogeneous
• Perfect Information about Price
• Equal Access to Resources
• Fragmented
• Undifferentiated Products : Homogeneous
• Perfect Information about Price
• Equal Access to Resources
Three ImplicationThree Implication
• Price Takers
• Law of one Price
• Free Entry & Free Exit
• Price Takers
• Law of one Price
• Free Entry & Free Exit
Profit MaximizationProfit Maximization
( ) ( ) ( )q TR q TC q ( ) ( ) ( )q TR q TC q
( ) { ( ) ( )}Max q Max TR q TC q ( ) { ( ) ( )}Max q Max TR q TC q
( )0
d q
dq
( )0
d q
dq
Profit Maximization Condition
( ) ( )0
d dTR q dTC q
dq dq dq
( ) ( )0
d dTR q dTC q
dq dq dq
( )dTR qMR
dq ( )dTR q
MRdq
( )dTC q
MCdq
( )dTC qMC
dq
MR MCMR MC
( ) ( )Slope TR Slope TC( ) ( )Slope TR Slope TC
TC
TR
Q
TR,TC
Q
Profit
MC
MR = P
0
0MC > MR MC = MRMC < MR MC > MR
Price
Q Q
Price
AR = P = MR
D
Firm Industry
AVC
AC
MC
P1A
C
Q
Price
0
MR = P
B
Q
Excess Profit
AVC
ACMC
P1A
C
Q
Price
0
MR = P
Q
AVC
ACMC
P1A
C
Q
Price
0
MR = P
B
Q
Loss
AVC
ACMC
P1A
C
Q
Price
0
MR = P
B
Q
Loss
AVC
ACMC
P1A
C
Q
Price
0
MR = P
B
Q
Loss
AVC
AC
MC
P1
P2
P3
P4
Q
Price
0
Shut Down Point
AVC
AC
MC
P1
P2
P3
P4
Q
Price
0
Shut Down Point
Firm’s Supply
The Firm’s short run total cost curve is STC = 100 +20Q + Q2.
The short run Marginal cost curve is SMC = 20 + 2Q
The Firm’s short run total cost curve is STC = 100 +20Q + Q2.
The short run Marginal cost curve is SMC = 20 + 2Q
ExampleExample
If SFC = 100, while SVC = 20Q + Q2If SFC = 100, while SVC = 20Q + Q2
Find AVC , Minimum level of average variable cost, supply curveFind AVC , Minimum level of average variable cost, supply curve
Fixed Cost + Sunk Cost
TFC = SFC + NSFCTFC = SFC + NSFC
NSFCANSC=AVC+
QNSFC
ANSC=AVC+Q
AVC
ACMC
P1
A
C
Q
Price
0
Minimum ANSC = P
B
Q
ANSC
The Firm’s short run total cost curve is STC = 100 +20Q + Q2.
The short run Marginal cost curve is SMC = 20 + 2Q
The Firm’s short run total cost curve is STC = 100 +20Q + Q2.
The short run Marginal cost curve is SMC = 20 + 2Q
ExampleExample
If SFC = 36, while NSFC = 64If SFC = 36, while NSFC = 64
Find ANSC , Minimum level of average non sunk cost, supply curveFind ANSC , Minimum level of average non sunk cost, supply curve
Firms Market
p
Q1 Q2 Q1+Q2Q Q
P P
Firm Supply and Market Supply
Short Run perfectly Competitive equilibrium
* * * *1 2 nS ( ) S ( ) .... S ( ) ( )P P P D P * * * *1 2 nS ( ) S ( ) .... S ( ) ( )P P P D P
D
S
D(P*)
SAC
Q* Q
P
Q
P
P*
The Market consists of 300 identical firms, and the market demand curve is given by
D(P) = 60 – P. Each firm has a short run cost curve
STC = 0.1 + 150Q2 , all fixed cost are sunk. The corresponding short run marginal cost curve
SMC = 300Q. The corresponding average variable cost curve is
AVC = 150Q. You should verify that the minimum level of AVC is 0. Thus, a firm will continue to produce as large as price is positive
The Market consists of 300 identical firms, and the market demand curve is given by
D(P) = 60 – P. Each firm has a short run cost curve
STC = 0.1 + 150Q2 , all fixed cost are sunk. The corresponding short run marginal cost curve
SMC = 300Q. The corresponding average variable cost curve is
AVC = 150Q. You should verify that the minimum level of AVC is 0. Thus, a firm will continue to produce as large as price is positive
Find Short run equilibrium in market, at equilibrium, do the firm make positive profit?Find Short run equilibrium in market, at equilibrium, do the firm make positive profit?
Comparative Statics in short runComparative Statics in short run
Increase in the number of firmIncrease in the number of firm
D
S
Q1
SAC
Q1f Q
P
Q
P
P1
S’
Q2
P2
Q2f
Long Run – Plant AdjustmentLong Run – Plant AdjustmentPrice
Quantity
P1SAC1
MC1 SAC2
MC2
LAC
LMC
Q1 Q2
Long Run Supply CurveLong Run Supply CurvePrice
Quantity
P1
LAC
LMC
Q1Q2Q*
P2
P*
Long Run Supply CurveLong Run Supply CurvePrice
Quantity
P1
LAC
LMC
Q1Q2Q*
P2
P*
Free Entry and Long Run Free Entry and Long Run
1. Long Run Profit is maximized with respect to output and plant size.1. Long Run Profit is maximized with respect to output and plant size.
P* = MC ( Q* )P* = MC ( Q* )
2. Economic profit is Zero.2. Economic profit is Zero.
P* = AC ( Q* )P* = AC ( Q* )
Free Entry and Long Run Free Entry and Long Run
3. Demand equals Supply.3. Demand equals Supply.
D( P* ) = n Q* D( P* ) = n Q*
D
S
D(P*) = n*Q*
LAC
Q* Q
P
Q
P
P*
SAC
LMCSMC
In this market, each firm and potential entrant has a long – run average cost
AC( Q ) = 40 – Q – 0.01Q2. And a corresponding long run marginal cost curve
MC( Q ) = 40 – 2Q + 0.03Q2. Where Q is thousand units per year. The Market demand curve is
D( P ) = 25,000 – 1,000P, Where D(P) is also measured in thousand units. Find the long run equilibrium price, quantity per firm, and number of firms.
In this market, each firm and potential entrant has a long – run average cost
AC( Q ) = 40 – Q – 0.01Q2. And a corresponding long run marginal cost curve
MC( Q ) = 40 – 2Q + 0.03Q2. Where Q is thousand units per year. The Market demand curve is
D( P ) = 25,000 – 1,000P, Where D(P) is also measured in thousand units. Find the long run equilibrium price, quantity per firm, and number of firms.
Long Run Market Supply CurveLong Run Market Supply Curve
D
S
Q1
LAC
Q1fQ
P
Q
P
P1
SAC
LMC
S’
D’
P2
Q2f Q2
A
B
Industry Long Run Supply CurveIndustry Long Run Supply Curve
D
S
Q1
LAC
Q1fQ
P
Q
P
P1
LMC
S’
D’
P2
Q2f Q2
A
B SL
Constant CostConstant Cost
Industry Long Run Supply CurveIndustry Long Run Supply Curve
D
S
Q1
LAC1
Q1fQ
P
Q
P
P1
LMC1
S’
D’
P2
Q2fQ2
SL
Increasing CostIncreasing Cost
P3
LMC2
LAC2
Problem 1Problem 1
The bolt industry currently consists of 20 producers, all of whom operate with identical short run total cost function
STC ( Q ) = 16 + Q2
Where Q is the annual output. The corresponding short run marginal cost curve is
SMC ( Q ) = 2QThe market demand for the bolts is
D ( P ) = 110 – PWhere P is the market price
The bolt industry currently consists of 20 producers, all of whom operate with identical short run total cost function
STC ( Q ) = 16 + Q2
Where Q is the annual output. The corresponding short run marginal cost curve is
SMC ( Q ) = 2QThe market demand for the bolts is
D ( P ) = 110 – PWhere P is the market price
c ) Determine the short run equilibrium price and quantity in the industry.c ) Determine the short run equilibrium price and quantity in the industry.
b ) What is the short run market supply curve?b ) What is the short run market supply curve?
a ) Assuming that all of the firm fixed cost is sunk, what is the firm’s short run supply curve?a ) Assuming that all of the firm fixed cost is sunk, what is the firm’s short run supply curve?
Problem 2Problem 2
Propylene is used to make plastic. The propylene industry is perfectly competitive, and each producer has a long run marginal cost function given by
MC ( Q ) = 40 – 12Q + Q2
The corresponding long run average cost function isAC ( Q ) = 40 – 6Q + (1/3)Q2
The market demand curve for propylene is D ( P ) = 2200 – 100P
Propylene is used to make plastic. The propylene industry is perfectly competitive, and each producer has a long run marginal cost function given by
MC ( Q ) = 40 – 12Q + Q2
The corresponding long run average cost function isAC ( Q ) = 40 – 6Q + (1/3)Q2
The market demand curve for propylene is D ( P ) = 2200 – 100P
c ) How many firms are in the propylene market in long run competitive equilibrium.c ) How many firms are in the propylene market in long run competitive equilibrium.
b ) At this price, how much would an individual firm produce?b ) At this price, how much would an individual firm produce?
a ) What is long run equilibrium price in the industry? a ) What is long run equilibrium price in the industry?
d ) Suppose the demand curve shifted so that it is now D ( P ) = A – 100P. How large would A have to be so that in the new long run competitive equilibrium, the number of propylene firms was twice what it was in the initial long run equilibrium?.
d ) Suppose the demand curve shifted so that it is now D ( P ) = A – 100P. How large would A have to be so that in the new long run competitive equilibrium, the number of propylene firms was twice what it was in the initial long run equilibrium?.
Problem 3Problem 3
The long run total cost function for producers of mineral water is
TC ( Q ) = cQWhere Q is the output of individual firm expressed as thousand liters per year. The market demand curve is
D ( P ) = a – bPFind the long run equilibrium price and quantity in term of a, b, c, . Can you determine the equilibrium number of firms? If so, what is it? Why not?
The long run total cost function for producers of mineral water is
TC ( Q ) = cQWhere Q is the output of individual firm expressed as thousand liters per year. The market demand curve is
D ( P ) = a – bPFind the long run equilibrium price and quantity in term of a, b, c, . Can you determine the equilibrium number of firms? If so, what is it? Why not?
