1、LaugheQ.How many economists does it take to screw in a light bulb?A.Eight.One to screw it in and seven to hold everything else constant.Perfect CovThe concept of competition is used in two ways in economics.Competition as a process is a rivalry among firms.Competition as the perfectly competitive ma
2、rket structure.CompetitiovCompetition involves one firm trying to take away market share from another firm.vAs a process,competition pervades the economy.Competition as a turevIt is possible to imagine something that does not exist a perfectly competitive market in which the invisible hand works uni
3、mpeded.Competition as a turevCompetition is the end result of the competitive process under highly restrictive assumptions.uA perfectly competitive market is one in which economic forces operate unimpeded.A Perfectly ComketvA perfectly competitive market is one in which economic forces operate unimp
4、eded.A Perfectly ComketvA perfectly competitive market must meet the following requirements:lBoth buyers and sellers are price takers.lThe number of firms is large.lThere are no barriers to entry.lThe firms products are identical.lThere is complete information.lFirms are profit maximizers.The Necess
5、ary ConditionCompetitionvBoth buyers and sellers are price takers.A price taker is a firm or individual who takes the market price as given.In most markets,households are price takers they accept the price offered in stores.The Necessary ConditionCompetitionvBoth buyers and sellers are price takers.
6、lThe retailer is not perfectly competitive.lA store is not a price taker but a price maker.The Necessary ConditionCompetitionvThe number of firms is large.lLarge means that what one firm does has no bearing on what other firms do.lAny one firms output is minuscule when compared with the total market
7、.The Necessary ConditionCompetitionvThere are no barriers to entry.lBarriers to entry are social,political,or economic impediments that prevent other firms from entering the market.lBarriers sometimes take the form of patents granted to produce a certain good.The Necessary ConditionCompetitionvThere
8、 are no barriers to entry.lTechnology may prevent some firms from entering the market.lSocial forces such as bankers only lending to certain people may create barriers.The Necessary ConditionCompetitionvThe firms products are identical.lThis requirement means that each firms output is indistinguisha
9、ble from any competitors product.The Necessary ConditionCompetitionvThere is complete information.lFirms and consumers know all there is to know about the market prices,products,and available technology.lAny technological advancement would be instantly known to all in the market.The Necessary Condit
10、ionCompetitionvFirms are profit maximizers.lThe goal of all firms in a perfectly competitive market is profit and only profit.lFirm owners receive only profit as compensation,not salaries.The Definition of SupplompetitionvIf all the necessary conditions for perfect competition exist,we can talk form
11、ally about the supply of a produced good.vThis follows from the definition of supply.The Definition of SupplompetitionvSupply is a schedule of quantities of goods that will be offered to the market at various prices.The Definition of SupplompetitionvThis definition requires the supplier to be a pric
12、e taker(the first condition for perfect competition).uSince most suppliers are price makers,any analysis must be modified accordingly.The Definition of SupplompetitionvBecause of the definition of supply,if any of the conditions are not met,the formal definition of supply disappears.The Definition o
13、f SupplompetitionvThat the number of suppliers be large(the second condition),means that they do not have the ability to collude.The Definition of SupplompetitionvConditions 3 through 5 make it impossible for any firm to forget about the hundreds of other firms just itching to replace their supply.u
14、Condition 6 specifies a firms goal profit.The Definition of SupplompetitionvEven if we cannot technically specify a supply function,supply forces are still strong and many of the insights of the competitive model can be applied to firm behavior in other market structures.Demand Curves for the ndustr
15、yvThe demand curves facing the firm is different from the industry demand curve.vA perfectly competitive firms demand schedule is perfectly elastic even though the demand curve for the market is downward sloping.Demand Curves for the ndustryvThis means that firms will increase their output in respon
16、se to an increase in demand even though that will cause the price to fall thus making all firms collectively worse off.Market supplyMarketdemand1,0003,000Price$1086420QuantityMarketFirmIndividual firm demand Market Demand Versus Indemand Curve102030Price$1086420QuantityProfit-MaximiziutputvThe goal
17、of the firm is to maximize profits.vWhen it decides what quantity to produce it continually asks how changes in quantity affect profit.Profit-MaximiziutputvSince profit is the difference between total revenue and total cost,what happens to profit in response to a change in output is determined by ma
18、rginal revenue(MR)and marginal cost(MC).uA firm maximizes profit when MC=MR.Profit-MaximiziutputvMarginal revenue(MR)the change in total revenue associated with a change in quantity.uMarginal cost(MC)-the change in total cost associated with a change in quantity.MarginavSince a perfect competitor ac
19、cepts the market price as given,for a competitive firm,marginal revenue is price(MR=P).MarginvInitially,marginal cost falls and then begins to rise.vMarginal concepts are best defined between the numbers.How to MaxivTo maximize profits,a firm should produce where marginal cost equals marginal revenu
20、e.How to MaxivIf marginal revenue does not equal marginal cost,a firm can increase profit by changing output.uThe supplier will continue to produce as long as marginal cost is less than marginal revenue.How to MaxivThe supplier will cut back on production if marginal cost is greater than marginal re
21、venue.uThus,the profit-maximizing condition of a competitive firm is MC=MR=P.CAP=D=MRCosts1 2 3 4 5 6 7 8 9 10Quantity6050403020100ABMCMarginal Cost,Margiand Price012345678910$28.0020.0016.0014.0012.0017.0022.0030.0040.0054.0068.00Price=MRQuantity Produced Marginal Cost$35.0035.0035.0035.0035.0035.0
22、035.0035.0035.0035.0035.00The Marginal Cost Curply CurvevThe marginal cost curve is the firms supply curve above the point where price exceeds average variable cost.The Marginal Cost Curply CurvevThe MC curve tells the competitive firm how much it should produce at a given price.uThe firm can do no
23、better than producing the quantity at which marginal cost equals price which in turn equals marginal revenue.The Marginal Cost Curve Iupply CurveABCMarginal costCost,Price$7060504030201001Quantity2345678910Firms MaximiztvWhen we speak of maximizing profit,we refer to maximizing total profit,not prof
24、it per unit.vFirms do not care about profit per unit;as long as an increase in output will increase total profits,a profit-maximizing firm should increase output.Profit Maximization Using e and Total CostvProfit is maximized where the vertical distance between total revenue and total cost is greates
25、t.vAt that output,MR(the slope of the total revenue curve)and MC(the slope of the total cost curve)are equal.TCTR0Total cost,revenue$3853503152802452101751401057035Quantity1 2 3 4 5 6 7 8 9Profit Determination Using Revenue CurvesMaximum profit=$81$130LossLossProfitTotal Profit at the Profit-evel of
26、 OutputvWhile the P=MR=MC condition tells us how much output a competitive firm should produce to maximize profit,it does not tell us the profit the firm makes.Determining Profit and ble of CostsvProfit can be calculated from a table of costs and revenues.vProfit is determined by total revenue minus
27、 total cost.Determining Profit and ble of CostsvThe profit-maximizing position is not necessarily a position that minimizes either average variable cost or average total cost.uIt is only the position that maximizes total profit.P=MR Output Total CostMarginalCostAverageTotal CostTotalRevenueProfitTR-
28、TC040.00040.0035.00168.0028.0068.0035.0033.0035.00288.0020.0044.0070.0018.0035.003104.0016.0034.67105.001.0035.004118.0014.0029.50140.0022.0035.005130.0012.0026.00175.0045.0035.006147.0017.0024.50210.0063.00Costs RelevP=MR Output Total CostMarginalCostAverageTotal CostTotalRevenueProfitTR-TC35.00411
29、8.0014.0029.50140.0022.0035.005130.0012.0026.00175.0045.0035.006147.0017.0024.50210.0063.0035.007169.0022.0024.14245.0076.0035.008199.0030.0024.88280.0081.0035.009239.0040.0026.56315.0076.0035.0010293.0054.0029.30350.0057.00Costs RelevDetermining Profit m a GraphvFind output where MC=MR.vThe interse
30、ction of MC=MR(P)determines the quantity the firm will produce if it wishes to maximize profits.Determining Profit m a GraphvFind profit per unit where MC=MR.uTo determine maximum profit,you must first determine what output the firm will choose to produce.uSee where MC equals MR,and then drop a line
31、 down to the ATC curve.uThis is the profit per unit.(a)Profit case(b)Zero profit case(c)Loss caseQuantityQuantityQuantityPrice65 60 55 50 45 40 35 30 25 20 15 10 5 065 60 55 50 45 40 35 30 25 20 15 10 5 01 2 3 4 5 6 7 8 910 121 2 3 4 5 6 7 8 910 12DMCAP=MRBATCAVCEProfitCMCATCAVCMCATCAVCLoss65 60 55
32、50 45 40 35 30 25 20 15 10 5 01 2 3 4 56 7 8 910 12P=MRP=MRPricePrice The McGraw-Hill Companies,Inc.,2000Irwin/McGraw-HillZero Profit or L=MRvFirms can also earn zero profit or even a loss where MC=MR.vEven though economic profit is zero,all resources,including entrepreneurs,are being paid their opp
33、ortunity costs.Zero Profit or L=MRvIn all three cases(profit,loss,zero profit),determining the profit-maximizing output level does not depend on fixed cost or average total cost,by only where marginal cost equals price.The ShutdvThe firm will shut down if it cannot cover average variable costs.A fir
34、m should continue to produce as long as price is greater than average variable cost.Once price falls below that point it makes sense to shut down temporarily and save the variable costs.The ShutdvThe shutdown point is the point at which the firm will gain more by shutting down than it will by stayin
35、g in business.The ShutdvAs long as total revenue is more than total variable cost,temporarily producing at a loss is the firms best strategy since it is taking less of a loss than it would by shutting down.MCP=MR2468 QuantityPrice6050403020100ATCAVCLossA$17.80The ShutdoShort-Run Market emandvWhile t
36、he firms demand curve is perfectly elastic,the industrys is downward sloping.vFor the industrys supply curve we use a market supply curve.Short-Run Market emandvIn the short run when the number of firms in the market is fixed,the market supply curve is just the horizontal sum of all the firms margin
37、al cost curves,taking account of any changes in input prices that might occur.Short-Run Market emandvSince all firms have identical marginal cost curves,a quick way of summing the quantities is to multiply the quantities from the marginal cost curve of a representative firm by the number of firms in
38、 the market.Long-Run CompetiriumvProfits and losses are inconsistent with long-run equilibrium.vProfits create incentives for new firms to enter,output will increase,and the price will fall until zero profits are made.vOnly zero profit will stop entry.Long-Run CompetiriumvThe existence of losses wil
39、l cause firms to leave the industry.uZero profit condition is the requirement that in the long run zero profits exist.uThe zero profit condition defines the long-run equilibrium of a competitive industry.Long-Run CompetiriumvZero profit does not mean that the entrepreneur does not get anything for h
40、is efforts.Long-Run CompetiriumvIn order to stay in business the entrepreneur must receive his opportunity cost or normal profits the owners of business would have received in the nest-best alternative.Long-Run CompetiriumvNormal profits are included as a cost and are not included in economic profit
41、.Economic profits are profits above normal profits.Long-Run CompetiriumvEven if some firm has superefficient workers or machines that produce rent,it will not take long for competitors to match these efficiencies and drive down the price.uRent is an income received by a specialized factor of product
42、ion.Long-Run CompetiriumvThe zero profit condition is enormously powerful.lIt makes the analysis of competitive markets far more applicable to the real world than can a strict application of the assumption of perfect competition.Long-Run CompetiriumMCP=MR0605040302010Price2468QuantitySRATCLRATCAdjus
43、tment from the LShort RunvIndustry supply and demand curves come together to lead to long-run equilibrium.An IncreasvAn increase in demand leads to higher prices and higher profits.vExisting firms increase output and new firms will enter the market,increasing output still more,price will fall until
44、all profit is competed away.An IncreasvIf the the market is a constant-cost industry,the new equilibrium will be at the original price but with a higher output.uA market is a constant-cost industry if the long-run industry supply curve is perfectly elastic.An IncreasvThe original firms return to the
45、ir original output but since there are more firms in the market,the total market output increases.An IncreasvIn the short run,the price does more of the adjusting.uIn the long run,more of the adjustment is done by quantity.Profit$910 120FirmPriceQuantityBAMarket Response to an DemandMarketQuantityPr
46、ice0BACMCACSLRS0SRD07700$9840 1,200D1S1SR7Long-Run MavTwo other possibilities exist:Increasing-cost industry factor prices rise as new firms enter the market and existing firms expand capacity.Decreasing-cost industry factor prices fall as industry output expands.An IncreasingryvIf inputs are specia
47、lized,factor prices are likely to rise when the increase in the industry-wide demand for inputs to production increases.An IncreasingryvThis rise in factor costs would force costs up for each firm in the industry and increases the price at which firms earn zero profit.An IncreasingryvTherefore,in in
48、creasing-cost industries,the long-run supply curve is upward sloping.A Decreasing-ryvIf input prices decline when industry output expands,individual firms marginal cost curves shift down and the long-run supply curve is downward sloping.A Decreasing-ryvInput prices may decline to the zero-profit con
49、dition when output rises and when new entrants make it more cost-effective for other firms to provide services to all firms in the market.A Real WorvOwners of the Ames chain of department stores decide to close over 100 stores after experiencing two years of losses(a shutdown decision).A Real WorvIn
50、itially,Ames thought the losses were temporary.uSince price exceeded average variable cost,it continued to produce even though it was losing money.A Real WorvAfter two years of losses,its prospective changed.uThe company moved from the short run to the long run.A Real WorvThey began to think that de
