1、PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University1414Firms in Competitive Markets 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or
2、otherwise on a password-protected website for classroom use.1What is a Competitive Market?Competitive marketPerfectly competitive marketMarket with many buyers and sellersTrading identical productsEach buyer and seller is a price takerFirms can freely enter or exit the market 2015 Cengage Learning.A
3、ll Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2What is a Competitive Market?Firm in a competitive marketTries to maxi
4、mize profit ProfitTotal revenue minus total cost Total revenue,TR=P QPrice times quantity Proportional to the amount of output 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain pro
5、duct or service or otherwise on a password-protected website for classroom use.3What is a Competitive Market?Average revenue,AR=TR/QTotal revenue divided by the quantity sold Marginal revenue,MR=TR/QChange in total revenue from an additional unit sold For competitive firmsAR=PMR=P 2015 Cengage Learn
6、ing.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.4Table 15 2015 Cengage Learning.All Rights Reserved.May not be cop
7、ied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Total,Average,and Marginal Revenue for a Competitive FirmProfit Maximization Maximize profitProduce quan
8、tity where total revenue minus total cost is greatestCompare marginal revenue with marginal costIf MR MC:increase productionIf MR MC,firm should increase outputIf MC MR,firm should decrease outputIf MR=MC,profit-maximizing level of output Marginal-cost curveDetermines the quantity of the good the fi
9、rm is willing to supply at any priceIs the supply curve 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classr
10、oom use.10Figure 211 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Marginal Cost as the Compet
11、itive Firms Supply CurvePrice An increase in the price from P1 to P2 leads to an increase in the firms profit-maximizing quantity from Q1 to Q2.Because the marginal-cost curve shows the quantity supplied by the firm at any given price,it is the firms supply curve.Quantity 0ATCAVCMCP1P2Q2Q1Profit Max
12、imization ShutdownShort-run decision not to produce anythingDuring a specific period of timeBecause of current market conditionsFirm still has to pay fixed costs ExitLong-run decision to leave the marketFirm doesnt have to pay any costs 2015 Cengage Learning.All Rights Reserved.May not be copied,sca
13、nned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.12Profit Maximization The firms short-run decision to shut downTR=total revenueVC=variable costs Firms decision
14、:Shut down if TR VC(P AVC,.2.butshuts downif PAVC.Profit Maximization Sunk costA cost that has already been committed and cannot be recoveredShould be ignored when making decisions“Dont cry over spilt milk”“Let bygones be bygones”In the short run,fixed costs are sunk costs 2015 Cengage Learning.All
15、Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.15Near-empty restaurants&off-season miniature golf Restaurant stay open fo
16、r lunch?Fixed costs Not relevant Are sunk costs in short runVariable costs relevantShut down if revenue from lunch variable costs16 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certai
17、n product or service or otherwise on a password-protected website for classroom use.Staying open can be profitable,even with many tables empty.Near-empty restaurants&off-season miniature golf Operator of a miniature-golf courseIgnore fixed costsShut down if Revenue variable costs17 2015 Cengage Lear
18、ning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Profit Maximization Firms long-run decisionExit the market if Tot
19、al revenue total costs;TR TCSame as:P total costs;TR TCSame as:P ATC Competitive firms long-run supply curveThe portion of its marginal-cost curve that lies above average total cost 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use a
20、s permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.18Figure 419 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distribute
21、d with a certain product or service or otherwise on a password-protected website for classroom use.The Competitive Firms Long-Run Supply CurveCostsIn the long run,the competitive firms supply curve is its marginal-costcurve(MC)above average total cost(ATC).If the price falls below average total cost
22、,the firm is better off exiting the market.Quantity 0MC1.In the long run,the firm produces on the MC curve if PATC,.2.but exits if P ATCProfit=TR TC=(P ATC)QIf P AVC:supply curve is MC curveMarket supplyAdd up quantity supplied by each firm 2015 Cengage Learning.All Rights Reserved.May not be copied
23、,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.22Figure 623 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or
24、in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Short-Run Market SupplyPriceIn the short run,the number of firms in the market is fixed.As a result,the market supply curve,shown in panel(b),
25、reflects the individual firms marginal-cost curves,shown in panel(a).Here,in a market of 1,000 firms,the quantity of output supplied to the market is 1,000 times the quantity supplied by each firm.Quantity(firm)0(a)Individual firm supplyMC100$2.00PriceQuantity(market)0(b)Market supply2001.00Supply10
26、0,000$2.00200,0001.00Supply Curve Long runFirms can enter and exit the marketIf P ATC,firms make positive profitNew firms enter the marketIf P ATC positive economic profit 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitte
27、d in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.28Supply Curve Positive economic profit in short runLong run firms enter the marketShort run supply curve shifts rightPrice decreases back to minimum ATCQuantity increases Beca
28、use there are more firms in the marketEfficient scale 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroo
29、m use.29Figure 830 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.An Increase in Demand in the
30、Short Run and Long Run(a)PricePriceThe market starts in a long-run equilibrium,shown as point A in panel(a).In this equilibrium,each firm makes zero profit,and the price equals the minimum average total cost.Quantity(market)0MarketQuantity(firm)0FirmATCMC(a)Initial ConditionShort-run supply,S1Demand
31、,D1Q1P1Long-runsupplyP1A1.A market begins inlong-run equilibrium2.with the firmearning zero profit.Figure 831 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service o
32、r otherwise on a password-protected website for classroom use.An Increase in Demand in the Short Run and Long Run(b)PricePricePanel(b)shows what happens in the short run when demand rises from D1 to D2.The equilibrium goes from point A to point B,price rises from P1 to P2,and the quantity sold in th
33、e market rises from Q1 to Q2.Because price now exceeds average total cost,each firm now makes a profit,which over time encourages new firms to enter the market.Quantity(market)0MarketQuantity(firm)0Firm(b)Short-Run ResponseS1D1Q1P1Long-runsupplyP1A3.But then an increase in demand raises the price4.l
34、eading toshort-run profits.D2BQ2P2P2MCATCFigure 832 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
35、use.An Increase in Demand in the Short Run and Long Run(c)PricePriceThis entry shifts the short-run supply curve to the right from S1 to S2,as shown in panel(c).In the new long-run equilibrium,point C,price has returned to P1 but the quantity sold has increased to Q3.Profits are again zero,and price
36、 is back to the minimum of average total cost,but the market has more firms to satisfy the greater demand.Quantity(market)0MarketQuantity(firm)0Firm(c)Long-Run ResponseS1D1Q1AD2BQ2P2MCATC5.When profits induce entry,supply increases and the price falls,6.restoring long-run equilibrium.S2CQ3P1P1Long-r
37、unsupplySupply Curve Long-run supply curve might slope upward Some resource used in production may be available only in limited quantitiesIncrease in quantity supplied increase in costs increase in priceFirms may have different costsSome firms earn profit even in the long run Long-run supply curveMore elastic than short-run supply curve 2015 Cengage Learning.All Rights Reserved.May not be copied,scanned,or duplicated,in whole or in part,except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.33
