Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition.
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Transcript of Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition.
Pure Competition
6LECTURE
Market Structure Continuum
FOUR MARKET MODELS
Pure Competition
Market Structure Continuum
PureCompetition
FOUR MARKET MODELS
Pure Monopoly
Market Structure Continuum
PureCompetition
PureMonopoly
FOUR MARKET MODELS
Imperfect Competition
Market Structure Continuum
PureCompetition
PureMonopoly
FOUR MARKET MODELS
Monopolistic Competition
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition
FOUR MARKET MODELS
Oligopoly
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSPure Competition:• Very Large Numbers• Standardized Product• “Price Takers”• Free Entry and Exit
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
Perfectly Elastic DemandPrice Taker Role
Total RevenueAverage Revenue
Marginal Revenue
For example...
$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
]]]]]]]]]]
$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…
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)
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?
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…
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?
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
$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
SHORT RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
Three Characteristics:• 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
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!
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
$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
$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
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
$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
$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
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
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
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
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
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
P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MC’s
IndustryFirm(price taker)
EconomicProfit
$111$111
SHORT RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” it’sPrice from the Industry Equilibrium
P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MC’s
IndustryFirm(price taker)
EconomicProfit
$111$111
SHORT RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” it’sPrice from the Industry Equilibrium
How about thelong-run?
PROFIT MAXIMIZATION IN THE LONG-RUN
Goal...
Price = Minimum ATC
Zero Economic Profit Model
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
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
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
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
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
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
P MR
Q
MCATC
Quantity
Pri
ce
Price = MC = Minimum ATC(normal profit)
LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM