Firms in Competitive Markets Chapter 14. Competitive Market Lots of buyers and sellers dealing in...
18
Firms in Competitive Markets Chapter 14
-
date post
19-Dec-2015 -
Category
Documents
-
view
222 -
download
0
Transcript of Firms in Competitive Markets Chapter 14. Competitive Market Lots of buyers and sellers dealing in...
Firms in Competitive Markets
Chapter 14
Competitive MarketLots of buyers and sellers dealing in identical goods.
Sellers can freely enter or leave.
Firms in a competitive market …
… are price takers. They take the price as given because nothing they do can affect it.
For a firm in a competitive market, the price is the marginal revenue.
Profit maximization assumption
Firms act to maximize profit (Π ).Profit = total revenue – total cost
= PQ – FC – VC
Profit maximization example
Q TR TC Π MR MC ΔΠ
0 0 3 (3) 6
1 6 5 1 6 2 4
2 12 8 4 6 3 3
3 18 12 6 6 4 2
4 24 17 7 6 5 1
5 30 23 7 6 6 0
6 36 30 6 6 7 (1)
7 42 38 4 6 8 (2)
8 48 47 1 6 9 (3)
Rule for profit maximization
If MC is rising, produce up to the point at which MC = MR.
Figure 1 Profit Maximization for a Competitive Firm
Copyright © 2004 South-Western
Quantity0
Costsand
Revenue
MC
ATC
AVC
MC1
Q1
MC2
Q2
The firm maximizesprofit by producing the quantity at whichmarginal cost equalsmarginal revenue.
QMAX
P = MR1 = MR2 P = AR = MR
Figure 2 Marginal Cost as the Competitive Firm’s Supply Curve
Copyright © 2004 South-Western
Quantity0
Price
MC
ATC
AVC
P1
Q1
P2
Q2
This section of thefirm’s MC curve isalso the firm’s supplycurve.
Figure 3 The Competitive Firm’s Short Run Supply Curve
Copyright © 2004 South-Western
MC
Quantity
ATC
AVC
0
Costs
Firmshutsdown ifP< AVC
Firm’s short-runsupply curve
If P > AVC, firm will continue to produce in the short run.
If P > ATC, the firm will continue to produce at a profit.
Shutdown vs. Exit
A shutdown refers to a short-run decision not to produce anything during a specific period of time.
Exit refers to a long-run decision to leave the market.
Figure 4 The Competitive Firm’s Long-Run Supply Curve
Copyright © 2004 South-Western
MC = long-run S
Firmexits ifP < ATC
Quantity
ATC
0
CostsFirm’s long-runsupply curve
Firmenters ifP > ATC
Figure 5 Profit as the Area between Price and Average Total Cost
Copyright © 2004 South-Western
(a) A Firm with Profits
Quantity0
Price
P = AR = MR
ATCMC
P
ATC
Q(profit-maximizing quantity)
Profit
Figure 5 Profit as the Area between Price and Average Total Cost
Copyright © 2004 South-Western
(b) A Firm with Losses
Quantity0
Price
ATCMC
(loss-minimizing quantity)
P = AR = MRP
ATC
Q
Loss
Figure 6 Market Supply with a Fixed Number of Firms
Copyright © 2004 South-Western
(a) Individual Firm Supply
Quantity (firm)0
Price
MC
1.00
100
$2.00
200
(b) Market Supply
Quantity (market)0
Price
Supply
1.00
100,000
$2.00
200,000
Figure 7 Market Supply with Entry and Exit
Copyright © 2004 South-Western
(a) Firm’s Zero-Profit Condition
Quantity (firm)0
Price
(b) Market Supply
Quantity (market)
Price
0
P = minimumATC
Supply
MC
ATC
Figure 8 An Increase in Demand in the Short Run and Long Run
Firm
(a) Initial Condition
Quantity (firm)0
Price
Market
Quantity (market)
Price
0
DDemand, 1
SShort-run supply, 1
P1
ATC
Long-runsupply
P1
1Q
A
MC
Figure 8 An Increase in Demand in the Short Run and Long Run
Copyright © 2004 South-Western
MarketFirm
(b) Short-Run Response
Quantity (firm)0
Price
MC ATCProfit
P1
Quantity (market)
Long-runsupply
Price
0
D1
D2
P1
S1
P2
Q1
A
Q2
P2
B
Figure 8 An Increase in Demand in the Short Run and Long Run
Copyright © 2004 South-Western
P1
Firm
(c) Long-Run Response
Quantity (firm)0
Price
MC ATC
Market
Quantity (market)
Price
0
P1
P2
Q1 Q2
Long-runsupply
B
D1
D2
S1
A
S2
Q3
C
