Perfect competition SFLS online

I.) Perfect competitionII.) Monopolistic competitionIII.) OligopolyIV.) Monopoly

Market Structure

Market Structure

Models – a word of warning!- Market structure deals with a number of economic

‘models’- These models are a representation of reality to

help us to understand what may be happening in real life

- There are extremes to the model that are unlikely to occur in reality

- They still have value as they enable us to draw comparisons and contrasts with what is observed in reality 比较和对比什么是现实

- Models help therefore in analysing and evaluating – they offer a benchmark基准

- Even with these warnings, they do help describe important concerns that you deal with everyday you interact in any economic way:

-Degree of competition affects the consumer will it benefit the consumer or not?

- Impacts on the performance and behaviour of the company/companies involved.

Market Structure

We will start with the structure that my vegetable

lady works in…


Market Structure

Profit = Total revenue – Total cost

the amount a firm receives from the sale of its output

the market value of the inputs a firm uses in production

What is the goal of business?We assume that the firm’s goal is to maximize profit.

But first we have to finish this, I didn’t do the revenue side

yet…


Costs summary:__________________________

Goods and Services produced

Time

Production summary:____________________

(TP) Total Product(MP) Marginal Product(AP) Average Product

Economic Profit

Accountant Profit

Explicit Costs Implicit Costs

Short Run

1.)Fixed Costs

2.)Variable Costs

Long Run

1.) All Variable

(TC) Total Cost

1.) (TFC) Total Fixed cost 2.) (TVC) Total Variable cost(MC) Marginal Cost

(AC) Average Cost

1.) (ATC) Average Total cost 2.) (AFC) Average Fixed cost 3.) (AVC) Average Variable cost

1.)Depreciation

2.) Normal Profit

(MP or MPL) Marginal Product of Labor

(DMR) Decreasing Marginal Returns

(TR) Total Revenue(MR) Marginal Revenue(AR) Average Revenue

Defining Revenue

(TR) Total Revenue TR = P x Q

Remember elasticity – the square area that shows the total amount received from a price and quantity.

P

Q

D

50

8

B

30

12

A

Demand for coffee Point A

30 x 12 = 360

Point B

50 x 8 = 400

Example Total Revenue Test

Remember P x Q with elasticities?

(MR) Marginal Revenue

Defining Revenue

(TR) Total revenue TR = P x Q

∆TR∆Q

MR =

TRQ

AR =

The change of the very last one sold from the next. Is the best way to find out efficiency.

(AR) Average Revenue


Defining Revenue

(TR) Total revenue TR = P x Q

∆TR∆Q

MR =

TRQ

AR =

Average of each unit, this will also will equal the price in a market



We assume that the firm’s goal is to maximize profit.




So a summary of all of it now real quick…


Costs summary:__________________________


Time



Economic Profit

Accountant Profit


Short Run

1.)Fixed Costs

2.)Variable Costs

Long Run

1.) All Variable

(TC) Total Cost


(AC) Average Cost


1.)Depreciation

2.) Normal Profit




When marginal product exceedsaverage product, average product is increasing.

When marginal product is less than average product, average product is decreasing.

When marginal product equalsaverage product, average product is at its maximum.


Costs summary:__________________________


Time



Economic Profit

Accountant Profit


Short Run

1.)Fixed Costs

2.)Variable Costs

Long Run

1.) All Variable

(TC) Total Cost


(AC) Average Cost


1.)Depreciation

2.) Normal Profit




(TC) Total Cost

(TFC) Total Fixed Cost

(TVC) Total Variable Cost

+

=

The (MC) marginal cost curve is U-shaped and intersects the (AVC) average variable cost curve and the (ATC) average total cost curve at their minimum points.

A firm’s average variable cost curve is linked to its average product curve.

If (AP) average product rises, (AVC) average variable cost falls.

If (AP) average product is a maximum, (AVC) average variable cost is a minimum.


Costs summary:__________________________


Time



Economic Profit

Accountant Profit


Short Run

1.)Fixed Costs

2.)Variable Costs

Long Run

1.) All Variable

(TC) Total Cost


(AC) Average Cost


1.)Depreciation

2.) Normal Profit




Economies of scale as output increases to 9 gallons an hour

constant returns to scale for outputs between 9 gallons and 12 gallons an hour.

and diseconomies of scale for outputs that exceed 12 gallons an hour.




The next two vocabulary parts are the super important ones to

note on every graph.


Profit Maximization

∆TR∆Q

Profit-Maximizing Output: level at which (MR) marginal revenue equals (MC) marginal cost

MR = MC

We assume all firms are profit maximizing, producing at the point where their profits are at their highest

(MC) Marginal Cost ∆TC

∆Q

Profit Maximization


MR = MC


If increase Q by one unit,revenue rises (or fall) by MR,cost rises by MC.

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

Profit-Maximizing LevelWhere marginal revenue equals

marginal cost

MR = MC

Cost-Minimizing Level Where marginal costs equals lowest point

on average total cost curve

MC = ATC

Profit Maximization


marginal cost

MR = MC



MC = ATC

Profit Maximization

Step 1 on every graph is this point


marginal cost

MR = MC



MC = ATC

Profit Maximization

Step 2 on every graph is this point


Four Market Types

Market Structure

Quick summary and comparison…

I.) Perfect competition

Market Structure

Easy to enter/exit market

More competitive

Goods are very similar

Efficient allocation

II.) Monopolistic competition

Market Structure


Competitive

Goods are different

Not very efficient allocation

III.) Oligopoly

Market Structure

Hard to enter/exit market

Competitive

Goods are similar

Not efficient allocation

IV.) Monopoly

Market Structure

Hard to enter/exit market

Not competitive

Only one seller

Not efficient allocation

Market StructureMore competitive (fewer imperfections)

Perfect Competition

Pure Monopoly

Market Structure

Perfect Competition

Pure Monopoly

Less competitive (greater degree of imperfection)

Market Structure

Perfect Competition

Pure Monopoly

The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Monopolistic Competition Oligopoly Duopoly Monopoly

Market Types

I.) perfect competition

Ok, finally…

Characteristic Perfect Competition

Monopolistic Competition

Oligopoly Monopoly

Substitution ofProduct sold

Barriers to entry into market

Pricing vs MC and MR

Efficiency

# of sellers



Oligopoly Monopoly




Efficiency

# of sellers

A summary of the notes for each type.



Oligopoly Monopoly




Efficiency

# of sellersMany

(price takers)

Only one product type from all

sellers

No barriers to enter/ exit

P =MC=MR

Efficient with zeroecon profit

P = ATC

I.) Perfect Competition-Many firms sell an identical product to many buyers.

She sells the same as everyone else and there

are lots of sellers

Like my vegetable Like my vegetable lady…lady…

I.) Perfect Competition-Many firms sell an identical product to many buyers.

-There are no restrictions on entry into (or exit from) the market.

-Established firms have no advantage over new firms.

-Sellers and buyers are well informed about prices

Price Taker - is a firm that cannot influence the price of the good or service that it produces.

I.) Perfect Competition

Price Taker

(More on Price Taker…)

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

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

MR = P for a Competitive Firm and is a perfectly elastic line

Fill in the empty spaces of the table.

$50$105

$40$104

$103

$102

$10$101

n/a$100

TRPQ MRAR

$10



$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



$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


Market TypesI.) perfect competition

I have created a large number of graphs here, however the transitions in the PPT make it easier to

follow, I recommend to download the other version of the PPT to follow since I can’t make transitions here

in this version of the PPT.

P

Q

P

S

D

QQ1

P1

This is the Demand and Supply Lines of the whole market

P

This line ends up being the only price they can charge

= MR

Which is also their marginal revenue on each unit

= D=AR

And the average revenue

So this is the demand curve for the single firm in the market



Profit Maximization

∆TR∆Q


MR = MC


(MC) Marginal Cost

∆TC∆Q

Step 1, find this Step 1, find this point!point!

505

404

303

202

101

$00

∆Profit = MR – MC

MCMRProfitTCTRQAt any Q with

MR > MC,increasing Q raises

profit.

10

10

10

10

$10

(continued from earlier table)

At any Q with

MR < MC,reducing Q raises

profit.

Profit Maximization

First – What is MC?

505

404

303

202

101

$00




profit.

10

10

10

10

$10


At any Q with


profit.

Profit Maximization


Second – What is Profit?

505

404

303

202

101

$00




profit.

10

10

10

10

$10


At any Q with


profit.

Profit Maximization


Second – What is Profit?

Third – What is Profit Max point?

P=MR=AR=D


Q

P

the MC curve is the Supply curve for the single firm in the market

MC

Rule: MR = MC is the profit-maximizing point

Q1Q2 Q3

= S

At any Q with


profit. At any Q with


profit.

P

Q

I.) Perfect Competition S

D

QQ1

P1

This is the Demand and Supply Lines of the whole market

P

So this is the Supply and Demand curves for the single firm in a perfectly competitive market

MC = S

Except for this big issue

This is not the only cost curve a firm faces we must add the others to truly determine the supply curve which also effect other decisions

P = MR = D=AR

Short Run Costs

(AVC) Average Variable Cost

(AFC) Average Fixed Cost

(ATC) Average Total Cost

will determine profits in the short and long run.

Will determine when a firm shuts down in the short run and exits the market in the long run.

Don’t care very much about this one

I.) Perfect Competition Cost Curves

Q

P

*** Any price below ATC is losing money and will effect decisions to shut down and exit the market in the long run

MC

Rule: MC = ATC is the cost minimizing point

Q1

ATC

Profit-Maximizing Level

Where marginal revenue equals marginal cost

MR = MC

Cost-Minimizing Where marginal costs equals lowest point


MC = ATC

Putting it all together…

I will start at the easiest graph and go the harder graphs, but this means I will have to do things a little bit out of order

Decisions are different in the long run and the short run and I will start with the long run first since it is the easiest graph and the graph that all the other ones are moving towards anyway.

P

Q

S

D

QQ1

P1

Market D + S

P

PC Firm Long Run Equilibrium

MC

This point is a normal profit ( = zero economic profit)- other firms won’t want to enter the market because there is no economic (abnormal ) profits- Output is productively and allocatively efficient

ATC

P=MR =AR =D

I.) Perfect Competition Long Run

Q1

P

Q

S

D

QQ1

P1

If price increases for any reason

P

PC Firm Short Run making profit

MC

A firm can make economic (abnormal) profit in the short run

ATC

P=MR =AR =D

I.) Perfect Competition Short Run

D1

Q2

P2

Price is above long run equilibrium of normal profits


Q

P MC

Q1 Q2

ATC

P=MR =AR =D

So a zoomed in version of the

graph…


Q

P MC

Q1 Q2

ATC

Profit-Maximizing


MR = MC P=MR =AR =D

Step 1Step 1


Q

P MC

Q1 Q2

ATC

Profit-Maximizing


MR = MC

Point at which Q equals ATC

P=MR =AR =D

Cost

Step 2Step 2


Q

P MC

Q1 Q2

ATC

Profit-Maximizing


MR = MC


P=MR =AR =D

Cost

Difference between AR and ATC

Profit Amount

Step 3Step 3

P

Q

S

QQ2

If price increases for any reason

P


MC

Since there are low barriers to enter the market, firms will see there is a profit to be made and so more firms will enter the market

ATC

P=MR =AR =D


D

Q2

P2

P

Q

S

QQ1

P1

PMC

ATC

P=MR =AR =D


D

Q1

P2

S1

Q2 Q2


This will increase the supply and lower the price until it reaches long run equilibrium again and all abnormal profits will be gone

P

Q

S

D

QQ1

P1

Market D + S

P


MC


ATC

P=MR =AR =D


P

Q

S

D

QQ1

P1

If price decreases for any reason

P

PC Firm Short Run losing money

MC

A firm will be losing money because the price they can get is below the costs they have at every point they can produce

ATC

P=MR =AR =D


D1

Q2

P2


Q

P MC

Q2

ATC

P=MR =AR =D

So a zoomed in version of the

graph…


Q

P MC

Q2

ATC

Profit-Maximizing

level at which (MR) marginal revenue equals (MC) marginal cost

MR = MCP=MR =AR =D

Step 1Step 1


Q

P MC

Q2

ATC

Profit-Maximizing


MR = MC


P=MR =AR =D

Cost

Step 2Step 2


Q

P MC

Q2

ATC

Profit-Maximizing


MR = MC


P=MR =AR =D

Cost

Difference between AR and ATC

Loss Amount

Step 3Step 3

P

Q QQ2

P


MC ATC

P=MR =AR =D


D

Q2

P2

Since there are low barriers to exit the market and a firm is losing money at the price that it can get, a firm will leave the market.

S

P

Q

S

QQ1

P1

Firms leave the market

P


MC ATC

P=MR =AR =D


D

Q2

S1

Since there are low barriers to exit the market and a firm is losing money at the price that it can get, a firm will leave the market.

Enough firms leave will cause the supply line to shift left as there is less

Q1 Q2

P2

P

Q Q

Market D + S

P


MC


ATC

P=MR =AR =D


P1

D

S

Q1

The decision to shut down

point where a firm shuts down but is only a temporary situation.

point where a firm shuts down and is a permanent situation.

Long Run Short Run

A firm is still going to have fixed costs ( TFC )

Costs are zero, they have left the market

Shut down = revenue loss = TR Exit = revenue loss = TR

Shut down = cost savings = VC

Shut down if TR < VC

Shut down if P < AVC

Exit = cost savings = TC

Exit if TR < TC

Exit if P < ATC

P

Q

S

D

QQ1

P1

Market D + S

P

PC Firm exit situation

MC

If price is permanently below ATC the firm will never be able to make a profit so they will stay out of the market

ATC

P=MR =AR =D

I.) Long Run Exit the Market

Exit if P < ATC

P

Q

S

D

QQ1

P1

Market D + S

P

PC Firm shutdown situation

MC

If price is below AVC there is no output that would be profitable, a firm can minimize their losses by not producing

If the price is above AVC at least some of those costs are covered by producing and would only be losing on some or all of the fixed costs

ATC

P=MR =AR =D

I.) Short Run Shut down point

Shutdown if P < AVC

AVC

P

Q QQ1

P1

PMC

ATC

P=MR =AR =D

Long Run ExitShort Run Shutdown MC ATC

P=MR =AR =D

AVC

A firm is still going to have fixed costs ( TFC )

Costs are zero, they have left the market

Shut down = revenue loss = TR Exit = revenue loss = TR

Shut down = cost savings = VC

Shut down if TR < VC

Shut down if P < AVC

Exit = cost savings = TC

Exit if TR < TC

Exit if P < ATC

P

Q

S

QQ1

P1

PMC

ATC

P=MR =AR =D


D

Q2Q1

A new technology lowers cost for a firm and allows them to make a larger profit

P

Q

S

QQ1

P1

P


MC

ATC

P=MR =AR =D


D

Q2

ATC1

MC1


Q1

P

Q

S

QQ1

P1

P


P=MR =AR =D


D

Q2

P2

ATC1

MC1

S1



Q1

P

Q QQ1

P

P=MR =AR =D


D

Q2

S1

P2P=MR =AR =D

ATC1

MC1

Market D + S PC Firm Long Run Equilibrium


P

Q

S

D

QQ1

P1

Market D + S

P

Perfectly Competitive Firm

MC

MB = MC = max efficientMC = SMB = D

ATC

P=MR =AR =D

I.) Perfect Competition Welfare Analysis

MC = SMB = D = PP = MC = total

surplus is maximized

P

Q Q

Abnormal profit - YES

Productively - NOEfficient (Q = min ATC ) Allocatively - YESEfficient ( P = MC )

PMC

ATC

P=MR =AR =D

Long Run Short Run MC

ATC

P=MR =AR =D

Abnormal profit - NO

Productively - YESEfficient (Q = min ATC ) Allocatively - YESEfficient ( P = MC )


Market Structure

So to summarize…


Market Structure


More competitive

Goods are very similar

Efficient allocation



Oligopoly Monopoly




Efficiency

# of sellersMany

(price takers)

Only one product type from all

sellers

No barriers to enter/ exit

P =MC=MR

Efficient with zeroecon profit

P = ATC

The End Thank you

Perfect competition SFLS online

Education

Transcript of Perfect competition SFLS online