Perfect Competition - Price Takers
description
Transcript of Perfect Competition - Price Takers
Principles of Microeconomics : Ch.14 First Canadian Edition
Perfect Competition - Price Takers
The individual firm produces such a small portion of the total market output that it cannot influence the price it charges for the product it sells.
The firm is a Price Taker in that it takes the market-determined price as the price it will receive for its output.
Principles of Microeconomics : Ch.14 First Canadian Edition
The Revenue of a Competitive Firm
Total Revenue for a firm is the market selling price times the quantity sold.
TR = (P x Q) Total revenue is proportional to the
amount of output. Graphically: Total revenue increases
at a constant rate, as each unit sold sells for a constant price.
Principles of Microeconomics : Ch.14 First Canadian Edition
$25
$20
$15
$10
$ 5
$
Quantity
Total Revenue
1 2 3 4 5
At a market price of $5, total revenueis ($5x1) = $5!
Total Revenue: Competitive Firm
Principles of Microeconomics : Ch.14 First Canadian Edition
Alternative Measurements of Revenue
Average Revenue:–Tells us how much revenue a firm
receives for the typical unit sold.
AR = TR ÷ Q–Average Revenue equals the Price of the
good, in Perfect Competition.
Principles of Microeconomics : Ch.14 First Canadian Edition
Alternative Measurements of Revenue
Marginal Revenue:–Tells us how much revenue a firm
receives for one additional unit of output.
MR = TR ÷ Q–Marginal Revenue equals the Price of the
good, in Perfect Competition. Graphically: Each unit sold will add
the same amount to total revenue, $5!
Principles of Microeconomics : Ch.14 First Canadian Edition
Total Revenue: Competitive Firm
$25
$20
$15
$10
$ 5
$
Quantity
Total Revenue
1 2 3 4 5
MarginalRevenue
Principles of Microeconomics : Ch.14 First Canadian Edition
Profit Maximization
$25
$20
$15
$10
$ 5
$
Quantity1 2 3 4 5
Total Cost
Principles of Microeconomics : Ch.14 First Canadian Edition
Profit Maximization
$25
$20
$15
$10
$ 5
$
Quantity
Total Revenue
1 2 3 4 5
Total Cost
$ MaximumProfit
at Q = 3 units!}
Principles of Microeconomics : Ch.14 First Canadian Edition
Profit Maximization
Maximum profits occur at a quantity that maximizes the difference (distance) between revenue and costs.
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Cost Curves
Revisit of average cost curves:–The marginal-cost curve (MC) eventually
increases.
–The average-total-cost curve (ATC) is U-shaped.
–Marginal Cost crosses the Average-Total-Cost at the minimum ATC.
Graphically. . .
Principles of Microeconomics : Ch.14 First Canadian Edition
The Shape of Typical Cost CurvesC
ost
($’
s)
Quantity
MCATC
AVC
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Profit- Maximizing Output
Add a line for the market price which is the same as the firm’s average revenue (AR) and its marginal revenue (MR).
Identify the level of output that maximizes profit.
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Profit- Maximizing Output
Quantity
MCATC
AVC
P=MR=AR
QMax
Price
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Profit- Maximizing Output
Quantity
MCATC
AVC
P=MR=AR
QMax
MaximumProfit
Price
P
ATC
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Shut-Down Decision
Alternative levels of output produced because the firm is a price taker.
If the selling price is below the minimum average variable cost, the firm should shut-down!
The minimum loss would equal to the firm’s Total Fixed Cost.
Principles of Microeconomics : Ch.14 First Canadian Edition
Shut-Down! Costs are greater than market price
Quantity
MCATC
AVC
P=MR=AR
Loss in Excess of Fixed Costs
Q Don’t Produce!
Price
Principles of Microeconomics : Ch.14 First Canadian Edition
Short-Run Production Minimize Losses when MR = MC
Quantity
MCATC
AVC
P=MR=AR
Q short-run
Price
P
ATC
Losses are lessthan fixed costs
Principles of Microeconomics : Ch.14 First Canadian Edition
Quantity
MCATC
AVC
P=MR=AR
QMax
Price
PATC
Maximum EconomicProfit
Short-Run Production Maximize Profits when MR = MC
Principles of Microeconomics : Ch.14 First Canadian Edition
In the long-run the typical firm will operate where:MR = MCNormal Profit where Price = ATCMinimum ATC
Why? Due to Easy EntryDue to Intense Competition
Long-Run Production Normal Profits when MR = MC
Principles of Microeconomics : Ch.14 First Canadian Edition
Quantity
MC ATC
P=MR=AR
QLR
Price
Long-Run Production Normal Profits when MR = MC
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Supply Curve
Short-Run Supply:
–Is the portion of its marginal cost curve that lies above average variable cost.
Long-Run Supply:
–Is the marginal cost curve above the minimum point of its average total cost curve.
Principles of Microeconomics : Ch.14 First Canadian Edition
Competitive Firm’s SR Supply Curve
Quantity
MCATC
AVC
P=MR=AR
Q1
P1
Price
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Supply Curve
Quantity
MCATC
AVC
P=MR=AR
Q3Q1 Q2
P1
P2
P3
Price
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Supply Curve
QuantityQ3Q1 Q2
P1
P2
P3
Price
Firms Short-Run Supply
Curve
}
Principles of Microeconomics : Ch.14 First Canadian Edition
The Firm’s Profit
Profit equals total revenue (TR) minus total costs (TC)–Profit = TR - TC
–Profit = ([TR ÷ Q] - [TC ÷ Q]) x Q
–Profit = (P - ATC) x Q
Principles of Microeconomics : Ch.14 First Canadian Edition
The Competitive Firm’s Decision To Produce, Shut-Down or Exit
In the short-run, a firm will choose to shut-down temporarily if the price of the good is less than the average variable cost.
In the long-run when the firm can recover both fixed and variable costs, the firm will choose to exit if the price is less than average total cost.
Principles of Microeconomics : Ch.14 First Canadian Edition
The Market Supply Curve
For any given price, each firm supplies a quantity of output so that price equals its marginal cost.
The quantity of output supplied to the market equals the sum of the quantities supplied by the individual firms.
Principles of Microeconomics : Ch.14 First Canadian Edition
The Market Supply Curve Firms will enter or exit the market until
profit is driven to zero. In the long-run, price equals the minimum of average total cost.
Because firms can enter and exit more easily in the long-run than in the short-run, the long-run supply curve is more elastic than the short-run supply curve.
Principles of Microeconomics : Ch.14 First Canadian Edition
Summary/Conclusion
If business firms are competitive and profit-maximizing, the price of a good equals the marginal cost of making that good.
If firms can freely enter and exit the market, the price also equals the lowest possible average total cost of production.