Chapter 10 - PBworksmorolda.pbworks.com/w/file/fetch/90856599/Chap010.pdf · 1010 % Profit...

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Chapter 10 Pure Compe**on in the Short Run Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Transcript of Chapter 10 - PBworksmorolda.pbworks.com/w/file/fetch/90856599/Chap010.pdf · 1010 % Profit...

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Chapter 10 Pure  Compe**on  in  the  Short  Run  

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  

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10-­‐2  

Four Market Models

•  Pure  compe**on  •  Pure  monopoly  •  Monopolis*c  compe**on  •  Oligopoly  

Pure    Compe**on  

Monopolis*c  Compe**on  

Oligopoly   Pure  

Monopoly  

Market  Structure  Con*nuum  

LO1  

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10-­‐3  

Four Market Models Characteris*cs  of  the  Four  Basic  Market  Models  

Characteris*c  Pure  

Compe**on  Monopolis*c    Compe**on   Oligopoly   Monopoly  

Number  of  firms   A  very  large  number  

Many   Few   One  

Type  of  product   Standardized   Differen*ated   Standardized  or  differen*ated  

Unique;  no  close  subs.  

Control  over  price   None   Some,  but  within  rather  narrow  limits  

Limited  by  mutual  inter-­‐dependence;  considerable  with  collusion  

Considerable  

Condi*ons  of  entry   Very  easy,  no  obstacles  

Rela*vely  easy   Significant  obstacles   Blocked  

Nonprice  Compe**on  

None   Considerable  emphasis  on  adver*sing,  brand  names,  trademarks  

Typically  a  great  deal,  par*cularly  with  product  differen*a*on  

Mostly  public  rela*on  adver*sing  

Examples   Agriculture   Retail  trade,  dresses,  shoes   Steel,  auto,  farm  implements  

Local  u*li*es  

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10-­‐4  

Pure Competition: Characteristics

•  Very  large  numbers  of  sellers  •  Standardized  product  •  “Price  takers”  •  Easy  entry  and  exit  

LO2  

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10-­‐5  

Purely Competitive Demand

•  Perfectly  elas*c  demand  •  Firm  produces  as  much  or  liXle  as  they  wish  at  the  market  price  •  Demand  graphs  as  horizontal  line  

LO3  

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10-­‐6  

Average, Total, and Marginal Revenue

•  Average  revenue  •  Revenue  per  unit  •  AR  =  TR/Q  =  P  

•  Total  revenue    •  TR  =  P  X  Q  

•  Marginal  revenue    •  Extra  revenue  from  1  more  unit  • MR  =  ΔTR/ΔQ  

LO3  

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10-­‐7  

Average, Total, and Marginal Revenue

4  2   6   8   10   12  

$1179  

   131  

262  

524  

655  

786  

917  

1048  

393  

TR  

D  =  MR  =  AR  

Quan*ty  demanded  (sold)  

Price  an

d  revenu

e  

Firm’s  Demand  Schedule  (Average  Revenue)  

Firm’s  Revenue  Data  

P   QD   TR   MR  

$131  131  131  131  131  131  131  131  131  131  131  

0  1  2  3  4  5  6  7  8  9  10  

$0  131  262  393  524  655  786  917  

1048  1179  1310  

$131  131  131  131  131  131  131  131  131  131  

] ] ] ] ] ] ] ] ] ]

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10-­‐8  

Profit Maximization: TR – TC Approach

•  The  compe**ve  producer  will  ask  three  ques*ons  •  Should  the  firm  produce?  •  If  so,  in  what  amount?  • What  economic  profit  (loss)  will  be  realized?  

LO4  

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10-­‐9  

Profit Maximization: TR-TC Approach

LO3  

The  Profit-­‐Maximizing  Output  for  a  Purely  Compe**ve  Firm:  Total  Revenue  –  Total  Cost  Approach  (Price  =  $131)  

(1)  Total  Product  (Output)  (Q)  

(2)  Total  Fixed  Cost  

(TFC)  

(3)  Total  Variable  Costs  (TVC)  

(4)  Total  Cost  

(TC)  

(5)  Total  Revenue  

(TR)  

(6)  Profit  (+)  or  Loss  (-­‐)  

0   $100   $0   $100   $0   $-­‐100  

1   100   90   190   131   -­‐59  

2   100   170   270   262   -­‐8  

3   100   240   340   393   +53  

4   100   300   400   524   +124  

5   100   370   470   655   +185  

6   100   450   550   786   +236  

7   100   540   640   917   +277  

8   100   650   750   1048   +298  

9   100   780   880   1179   +299  

10   100   930   1030   1310   +280  

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10-­‐10  

Profit Maximization: TR–TC Approach

LO4  

1  0   2   3   4   5   6   7   8   9   10  11  12  13  14  

1  0   2   3   4   5   6   7   8   9   10  11  12  13  14  

$1800  1700  1600  1500  1400  1300  1200  1100  1000  900  800  700  600  500  400  300  200  100  

$500  400  300  200  100  

Total  reven

ue  and

 total  cost  

Total  econo

mic  

profi

t  

Quan*ty  demanded  (sold)

Quan*ty  demanded  (sold)  

Total  revenue,  (TR)  

Break-­‐even  point  (Normal  profit)  

Break-­‐even  point  (Normal  profit)  

Maximum  economic  profit  $299  

Total  economic  profit  

$299  

P=$131  

Total  cost,  (TC)  

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10-­‐11  

Profit Maximization: MR-MC Approach

LO3  

The  Profit-­‐Maximizing  Output  for  a  Purely  Compe**ve  Firm:  Marginal  Revenue  –  Marginal  Cost  Approach  (Price  =  $131)  

(1)  Total  

Product  (Output)  

(2)  Average  Fixed  Cost  (AFC)  

(3)  Average  

Variable  Costs  (AVC)  

(4)  Average  Total  

Cost  (ATC)  

(5)  Marginal  Cost  

(MC)  

(5)  Price  =  Marginal  Revenue  (MR)  

(6)  Total  Economic  

Profit  (+)  or  Loss  (-­‐)  

0   $-­‐100  

1   $100.00   $90.00   $190   $90   $131   -­‐59  

2   50.00   85.00   135   80   131   -­‐8  

3   33.33   80.00   113.33   70   131   +53  

4   25.00   75.00   100.00   60   131   +124  

5   20.00   74.00   94.00   70   131   +185  

6   16.67   75.00   91.67   80   131   +236  

7   14.29   77.14   91.43   90   131   +277  

8   12.50   81.25   93.75   110   131   +298  

9   11.11   86.67   97.78   130   131   +299  

10   10.00   93.00   103.00   150   131   +280  

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10-­‐12  

Profit Maximization: MR-MC Approach Co

st  and

 revenu

e  

$200  

150  

100  

50  

0  1   2   3   4   5   6   7   8   9   10  

Output  

Economic  profit   MR  =  P  

MC  MR  =  MC  

AVC  

ATC  

P=$131  

A=$97.78  

LO5  

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10-­‐13  

Loss-Minimizing Case

•  Loss  minimiza*on  •  S*ll  produce  because  MR  >  minimum  AVC  •  Losses  at  a  minimum  where  MR  =  MC  •  Producing  adds  more  to  revenue  than  to  costs  

LO5  

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10-­‐14  

Loss-Minimizing Case Co

st  and

 revenu

e  

$200  

150  

100  

50  

0  1   2   3   4   5   6   7   8   9   10  

Output  

Loss  

MR  =  P  

MC  

AVC  

ATC  

P=$81  

A=$91.67  

V  =  $75  

LO5  

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10-­‐15  

Shutdown Case Co

st  and

 revenu

e  

$200  

150  

100  

50  

0  1   2   3   4   5   6   7   8   9   10  

Output  

MR  =  P  

MC  

AVC  

ATC  

P=$71  

V  =  $74  

Short-­‐run  shut  down  point  P  <  minimum  AVC  

$71  <  $74  

LO5  

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10-­‐16  

Marginal Cost and Short Run Supply

The  Supply  Schedule  of  a  Compe**ve  Firm  Confronted  with  Cost  Data  from  Table  

Price  Quan*ty  Supplied  

Maximum  Profit  (+)  Minimum  Loss  (-­‐)  

$151   10   $+480  

131   9   +299  

111   8   +138  

91   7   -­‐3  

81   6   -­‐64  

71   0   -­‐100  

61   0   -­‐100  

LO6  

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10-­‐17  

Marginal Cost and Short-Run Supply

P1  

0  

Cost  and

 revenu

es  (d

ollars)  

Quan*ty  supplied  

MR1  

P2   MR2  

P3   MR3  

P4   MR4  

P5   MR5  

MC  

AVC  

ATC  

Q2   Q3   Q4   Q5  

a b

c

d

e

LO6  

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10-­‐18  

Marginal Cost and Short-Run Supply

P1

0

Cost  and

 revenu

es  (d

ollars)  

Quan*ty  supplied  

MR1  

P2 MR2  

P3 MR3  

P4 MR4  

P5 MR5  

MC  

AVC  

ATC  

Q2 Q3 Q4 Q5

a b

c

d

e

S  

Shut-­‐down  point    (If  P  is  below)  

LO6  

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10-­‐19  

3 Production Questions

Output  Determina*on  in  Pure  Compe**on  in  the  Short  Run  

Ques*on   Answer  

Should  this  firm  produce?   Yes,  if  price  is  equal  to,  or  greater  than,  minimum  average  variable  cost.  This  means  that  the  firm  is  profitable  or  that  its  losses  are  less  than  its  fixed  cost.  

What  quan*ty  should  this  firm  produce?   Produce  where  MR  (=P)  =  MC;  there,  profit  is  maximized  (TR  exceeds  TC  by  a  maximum  amount)  or  loss  is  minimized.  

Will  produc*on  result  in  economic  profit?   Yes,  if  price  exceeds  average  total  cost  (TR  will  exceed  TC).  No,  if  average  total  cost  exceeds  price  (TC  will  exceed  TR).  

LO6  

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10-­‐20  

Firm and Industry: Equilibrium

Firm  and  Market  Supply  and  Market  Demand  

(1)  Quan*ty  Supplied,    Single  Firm  

(2)  Total  

Quan*ty  Supplied,  1000  Firms  

(3)  Product  Price  

(4)  Total  

Quan*ty  Demanded  

10   10,000   $151   4000  

9   9000   131   6000  

8   8000   111   8000  

7   7000   91   9000  

6   6000   81   11,000  

0   0   71   13,000  

0   0   61   16,000  

LO6  

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10-­‐21  

Firm versus Industry: Equilibrium

Economic  profit  

d  ATC  

AVC  

s  =  MC  

$111   $111  

D  

S  =  ∑  MC’s  

8   8000  

LO6  

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10-­‐22  

Fixed Costs: Digging Out of a Hole

•  Shukng  down  in  the  short  run  does  not  mean  shukng  down  forever  

•  Low  prices  can  be  temporary  •  Some  firms  switch  produc*on  on  and  off  depending  on  the  market  price  

•  Examples:  oil  producers,  resorts,  and  firms  that  shut  down  during  a  recession