Verbal Bellringer Mankiw Ch 14

If I’m going to the store to buy paper clips, what am I going to care most about as a consumer?

If I’m going to the store to buy a smart phone, what am I going to care most about as a

consumer?

Is this product cheap or expensive?

Is there a lot of variety in this product?

Is this product easy to buy?

Does this product become cheaper if I buy more quantity?

Is this product easy for a firm to make?

Would this product be easy for a firm to leave the market?

Economic Competition

• 4 basic market types:– Perfect Competition– Monopolistic Competition– Oligopoly– Monopoly

• Measures price/nonprice competition, and product differentiation

Perfect Competition MarketPerfect Competition Market

• Features:Features:• Many firmsMany firms• Nearly identical productsNearly identical products• No pricing power No pricing power • ““price takers”price takers”• Easy to start new firmEasy to start new firm• Easy to close down firmEasy to close down firm• Perfectly informed Perfectly informed

consumersconsumers• Costs really importantCosts really important

Other Examples?Salt, gasoline, paper clips

Perfect Competition examples• In groups of 2-3

1.Write 3 examples of perfect competition markets that I didn’t give you in class

2.If you were in a perfectly competitive market how could you make more revenue?

3.If you were in a perfectly competitive market how could you make more profit?

4.How might economies of scale help firms in perfect competition?

FIRMS IN COMPETITIVE MARKETS 6

The Revenue of a Competitive Firm

• Total revenue (TR)

• Average revenue (AR)

• Marginal revenue (MR):The change in TR from selling one more unit. ∆TR

∆QMR =

TR = P x Q

TRQ

AR = = P

A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11

Calculating Calculating TRTR, , ARAR, , MRMR

7

Fill in the empty spaces of the table.

$50$105

$40$104

$103

$102

$10$101

n/a$100

TRPQ MRAR

$10

A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11

AnswersAnswers

8

Fill in the empty spaces of the table.

$50$105

$40$104

$103

$10

$10

$10

$10$102

$10$101

n/a

$30

$20

$10

$0$100

TR = P x QPQ∆TR

∆QMR =

TR

QAR =

$10

$10

$10

$10

$10

Notice that MR = P

Notice that MR = P

FIRMS IN COMPETITIVE MARKETS 9

MR = P for a Competitive Firm

• A competitive firm can keep increasing its output without affecting the market price.

• So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P.

MR = P is only true for firms in competitive markets.

MR = P is only true for firms in competitive markets.

FIRMS IN COMPETITIVE MARKETS 10

Profit Maximization

• What Q maximizes the firm’s profit?

• To find the answer, “think at the margin.”

If increase Q by one unit,revenue rises by MR,cost rises by MC.

• If MR > MC, then increase Q to raise profit.

• If MR < MC, then reduce Q to raise profit.

Cotton

Mankiw homework• Read Ch 14

1.Write 2 questions based on the reading

2.Page 297 #4 (problems)

3.Page 296 #2 (problems)

Perfect Competition examples• In groups of 2-3

1.Write 3 examples of perfect competition markets that I didn’t give you in class

2.If you were in a perfectly competitive market how could you make more revenue?

3.If you were in a perfectly competitive market how could you make more profit?

4.How might economies of scale help firms in perfect competition?