23 - 1 Copyright McGraw-Hill/Irwin, 2005 Four Market Models Demand as seen by a Purely Competitive...
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23 - 1 Copyright McGraw-Hill/Irwin, 2005 Four Market Model s Demand as seen by a Purely Competi tive Seller Short-Run Profit Maximization Marginal Revenue – Marginal Cost A pproach Short-Run Competi tive Equilibrium Long-Run Supply Long-Run Equilibr ium for a Competi tive Firm Pure Competition and Efficiency Key Terms Previo us Slide Next Slid e End End Show Show Pure Competiti on 23 C H A P T E R
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Transcript of 23 - 1 Copyright McGraw-Hill/Irwin, 2005 Four Market Models Demand as seen by a Purely Competitive...
23 - 1Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Pure Competition
23C H A P T E R
23 - 2Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Market Structure Continuum
FOUR MARKET MODELS
Pure Competition
23 - 3Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Market Structure Continuum
PureCompetition
FOUR MARKET MODELS
Imperfect Competition
All Markets that areNot Purely Competitive
23 - 4Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Market Structure Continuum
PureCompetition
FOUR MARKET MODELS
Pure Monopoly
23 - 5Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Market Structure Continuum
PureCompetition
PureMonopoly
FOUR MARKET MODELS
Monopolistic Competition
23 - 6Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition
FOUR MARKET MODELS
Oligopoly
23 - 7Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSPure Competition:• Very Large Numbers• Standardized Product• “Price Takers”• Free Entry and Exit
23 - 8Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
Perfectly Elastic DemandPrice Taker Role
Total RevenueAverage Revenue
Marginal Revenue
For example...
23 - 9Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 0 $ 0
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
23 - 10Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 131
0 1
$ 0131
$131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]
23 - 11Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 131131
0 1 2
$ 0131262
$131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]
23 - 12Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 131131131
0 1 23
$ 0131262393
$131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]]
23 - 13Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 131131131131
0 1 234
$ 0131262393524
$131131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]]]
23 - 14Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 131131131131131131131131131131
0 1 23456789
10
$ 0131262393524655786917
104811791310
$131131131131131131131131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]]]]]]]]]
23 - 15Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$131 131131131131131131131131131131
0 1 23456789
10
$ 0131262393524655786917
104811791310
$131131131131131131131131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]]]]]]]]]
GraphicallyPresented…
23 - 16Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
DEMAND, MARGINAL REVENUE, AND TOTALREVENUE IN PURE COMPETITION
TR
D = MR
1 2 3 4 5 6 7 8 9 10
1179
1048
917
786
655
524
393
262
131
0
Pri
ce
an
d r
ev
enu
e
Quantity Demanded (sold)
23 - 17Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
The Decision Rule:Produce in the short-run if it can realize
1- A profit (or)2- A loss less than its fixed costs
The Decision Process:•Should the firm produce?•What quantity should be produced?•What profit or loss will be realized?
23 - 18Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
The Decision Rule:Produce in the short-run if it can realize
1- A profit (or)2- A loss less than its fixed costs
The Decision Process:•Should the firm produce?•What quantity should be produced?•What profit or loss will be realized?
AppliedGraphically…
23 - 19Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TotalCost
0 1 23456789
10
TotalProduct
TotalFixedCost
TotalVariable
CostTotal
Revenue Profit
$ 100 100 100100100100100100100100100
$ 090
170240300370450540650780930
$ 100190270340400470550640750880
1030
Price: $131
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0131262393524655786917
104811791310
Can you see the
profit maxim
ization?
23 - 20Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
TotalCost
0 1 23456789
10
TotalProduct
TotalFixedCost
TotalVariable
CostTotal
Revenue Profit
$ 100 100 100100100100100100100100100
$ 090
170240300370450540650780930
$ 100190270340400470550640750880
1030
Price: $131
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0131262393524655786917
104811791310
Graphing Total
Cost & Revenue
23 - 21Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$1,8001,7001,6001,5001,4001,3001,2001,1001,000 900 800 700 600 500 400 300 200 100 0
To
tal r
eve
nu
e a
nd
to
tal c
ost
TotalRevenue
TotalCost
MaximumEconomic
Profits$299
Break-Even Point(Normal Profit)
Break-Even Point(Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
TOTAL REVENUE-TOTAL COST APPROACH
23 - 22Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
SHORT-RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
Three Characteristics of MR=MC Rule:• The rule applies only if producing
is preferred to shutting down• Rule applies to all markets• Rule can be restated P=MC
Second:Marginal-Revenue -Marginal Cost
Approach
MR = MC Rule
23 - 23Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
AverageTotalCost
0 1 23456789
10
TotalProduct
AverageFixedCost
AverageVariable
Cost
Price =MarginalRevenue
TotalEconomicProfit/Loss
$100.00
50.00 33.3325.0020.0016.6714.2912.5011.1110.00
$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
$ 131131131131131131131131131131
MarginalCost
90807060708090
110130150
Thesame profitmaximizing
result!
23 - 24Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
AverageTotalCost
0 1 23456789
10
TotalProduct
AverageFixedCost
AverageVariable
Cost
Price =MarginalRevenue
TotalEconomicProfit/Loss
$100.00
50.00 33.3325.0020.0016.6714.2912.5011.1110.00
$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
$ 131131131131131131131131131131
MarginalCost
90807060708090
110130150
Graphically
23 - 25Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
Profit Maximization Position
23 - 26Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
MR = MCOptimumSolution
Profit Maximization Position
23 - 27Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
the MR=MC rule still applies
If the price is lowered from $131 to $81…
…but the MR = MC point changes.
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position
23 - 28Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MRAVCATC
Economic Loss
$81.00$91.67
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position
23 - 29Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
$71.00
MARGINAL REVENUE-MARGINAL COST APPROACH
Short-Run Shut Down Point
Minimum AVCis the Shut-Down
Point
23 - 30Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
PriceQuantitySupplied
Maximum Profit (+)Or Minimum Loss (-)
Observe the impact upon profitability as price is changed
$151 131 111 91 81 71 61
10987600
$+480+299
+138 -3
-64 -100 -100
23 - 31Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
st a
nd
Rev
enu
e, (
do
llar
s) MC
MR1
AVC
ATC
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run Supply
Do notProduce –
Below AVC
Break-even(Normal Profit)Point
23 - 32Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
st a
nd
Rev
enu
e, (
do
llar
s)MC
MR1
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run SupplyYields theShort-Run
Supply Curve
Supply
NoProductionBelow AVC
23 - 33Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
AVC2
MC2
Higher Costs Move theSupply Curve to the LeftC
ost
an
d R
even
ue,
(d
oll
ars)
MC1
AVC1
Quantity Supplied
S1
S2
23 - 34Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
AVC2
MC2
Lower Costs Movethe Supply Curve
to the Right
Co
st a
nd
Rev
enu
e, (
do
llar
s)MC1
AVC1
Quantity Supplied
S1
S2
23 - 35Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MCs
IndustryFirm(price taker)
EconomicProfit
$111$111
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” itsPrice from the Industry Equilibrium
23 - 36Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MCs
IndustryFirm(price taker)
EconomicProfit
$111$111
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” itsPrice from the Industry Equilibrium
How about thelong-run?
23 - 37Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
PROFIT MAXIMIZATION IN THE LONG RUN
Assumptions...• Entry and Exit Only• Identical Costs• Constant-Cost IndustryGoal of the AnalysisPrice = Minimum ATCLong-Run Equilibrium - TheZero Economic Profit Model
23 - 38Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Temporary profits and the reestablishmentof long-run equilibrium
S1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
MR
D1
23 - 39Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
An increase in demand increases profits…
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
EconomicProfits
S1
23 - 40Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
New competitors increase supply, and lowerprices decrease economic profits.
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Zero EconomicProfits
S1
S2
23 - 41Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Decreases in demand, losses, and the reestablishment of long-run equilibrium
S1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D1
MR
23 - 42Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
A decrease in demand creates losses…
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
EconomicLosses
S1
23 - 43Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG RUN
D2
Return to ZeroEconomic Profits
S1
S3
Competitors with losses decrease supply, andprices return to zero economic profits.
23 - 44Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
LONG-RUN SUPPLY IN ACONSTANT COST INDUSTRY
Constant Cost Industry
Perfectly Elastic Long-Run Supply
Graphically...
23 - 45Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
=$50 S
D1
Z1
Q1
D2
Z2
Q2Q3
D3
Z3
100,000 110,00090,000
LONG-RUN SUPPLY IN ACONSTANT COST INDUSTRY
P1
P2
P3
23 - 46Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
=$50 S
D1
Z1
Q1
D2
Z2
Q2Q3
D3
Z3
100,000 110,00090,000
LONG-RUN SUPPLY IN ACONSTANT COST INDUSTRY
P1
P2
P3
How does an increasingcost industry differ?
23 - 47Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
$555045
S
D1
Y1
Q1
D2
Y2
Q2Q3
D3
Y3
100,000 110,00090,000
LONG-RUN SUPPLY IN ANINCREASING COST INDUSTRY
P1
P2
P3
23 - 48Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
$555045
S
D1
Y1
Q1
D2
Y2
Q2Q3
D3
Y3
100,000 110,00090,000
P1
P2
P3
How does adecreasing costindustry differ?
LONG-RUN SUPPLY IN ANINCREASING COST INDUSTRY
23 - 49Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P
Q
$555045
S
D1
Y1
Q1
D2
Y2
Q2Q3
D3
Y3
100,000 110,00090,000
P1
P2
P3
What is the long-run competitive
equilibrium?
LONG-RUN SUPPLY IN ANINCREASING COST INDUSTRY
23 - 50Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
P MR
Q
MCATC
Quantity
Pri
ce
Price = MC = Minimum ATC(normal profit)
LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM
23 - 51Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
PURE COMPETITION AND EFFICIENCY
Productive EfficiencyPrice = Minimum ATC
Allocative EfficiencyPrice = MC
UnderallocationPrice > MC
OverallocationPrice < MC
23 - 52Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
PURE COMPETITION AND EFFICIENCY
Productive EfficiencyPrice = Minimum ATC
Allocative EfficiencyPrice = MC
UnderallocationPrice > MC
OverallocationPrice < MC
Resources are
efficiently allocated
under competition
23 - 53Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
PURE COMPETITION AND EFFICIENCY
Productive EfficiencyPrice = Minimum ATC
Allocative EfficiencyPrice = MC
UnderallocationPrice > MC
OverallocationPrice < MC
ConsumerSurplus
23 - 54Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
PURE COMPETITION AND EFFICIENCY
Productive EfficiencyPrice = Minimum ATC
Allocative EfficiencyPrice = MC
UnderallocationPrice > MC
OverallocationPrice < MC
pure competition
pure monopoly
monopolistic competition
oligopoly
imperfect competition
price taker
average revenue
total revenue
marginal revenue
break-even point
MR = MC rule
short-run supply curve
long-run supply curve
constant-cost industry
increasing-cost industry
decreasing-cost industry
productive efficiency
allocative efficiency
ENDBACKCopyright McGraw-Hill/Irwin, Inc. 2005
23 - 56Copyright McGraw-Hill/Irwin, 2005
Four Market Models
Demand as seen by a Purely Competitive Seller
Short-Run Profit Maximization
Marginal Revenue – Marginal Cost Approach
Short-Run Competitive Equilibrium
Long-Run Supply
Long-Run Equilibrium for a Competitive Firm
Pure Competition and Efficiency
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Coming Next...
Pure Monopoly
Chapter 24
