Tài liệu Perfect Competition ppt

© 2003 McGraw-Hill Ryerson Limited.The Necessary Conditions for Perfect Competition The number of firms is large.. © 2003 McGraw-Hill Ryerson Limited.The Necessary Conditions for Perfe

© 2003 McGraw-Hill Ryerson Limited.

Chapter 11

Laugher Curve

Q 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

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Perfect Competition

The concept of competition is used in

two ways in economics

Competition as a process is a rivalry

among firms.

Competition as a market structure.

Competition as a Process

Competition involves one firm trying to

take away market share from another

firm

As a process, competition pervades the economy

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A Perfectly Competitive

Market

which has highly restrictive

assumptions, but which provides us

with a reference point we can use in

comparing different markets

A Perfectly Competitive

Market

In a perfectly competitive market:

The number of firms is large.

The firms' products are identical.

There is free entry and exit, that is, there

are no barriers to entry.

There is complete information.

Firms are profit maximizers.

Both buyers and sellers are price takers.

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The Necessary Conditions

for Perfect Competition

The number of firms is large

Large number of firms means that any one firm's output is very small when

compared with the total market.

What one firm does has no bearing on

market quantity or market price.

The Necessary Conditions

for Perfect Competition

Firms' products are identical

This requirement means that each firm's output is indistinguishable from any other firm’s output.

Firms sell homogeneous product.

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The Necessary Conditions

for Perfect Competition

There is free entry and free exit

Firms are free to enter a market in response

to market signals such as price and profit.

Barriers to entry are social, political, or

economic impediments that prevent other

firms from entering the market.

The Necessary Conditions

for Perfect Competition

There is free entry and free exit

Technology may prevent some firms from

entering the market.

There must also be free exit, without

incurring a loss.

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The Necessary Conditions

for Perfect Competition

There is complete information

Firms and consumers know all there is to

know about the market – prices, products,

and available technology.

Any technological advancement would be instantly known to all in the market.

The Necessary Conditions

for Perfect Competition

Firms are profit maximizers

The goal of all firms in a perfectly

competitive market is profit and only

profit.

There is no non-price competition (based

on quality, brand name, or the like).

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The Necessary Conditions

for Perfect Competition

Both buyers and sellers are price

takers

A price taker is a firm or individual who

takes the market price as given.

Neither supplier nor buyer possesses

market power

The Definition of Supply

and Perfect Competition

goods that will be offered to the market

at various prices

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The Definition of Supply

and Perfect Competition

This definition of supply requires the

supplier to be a price taker

The Definition of Supply

and Perfect Competition

Because of the definition of supply, if

any of the conditions required for

perfect competition are not met, the

formal definition of supply disappears

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The Definition of Supply

and Perfect Competition

That the number of suppliers be large

means that they do not have the ability

to collude (act together with other firms

to control price or market share)

The Definition of Supply

and Perfect Competition

Other conditions make it impossible for any firm to forget about the hundreds of other firms waiting to replace their

supply

A firm's goal is specified by the

condition of profit maximization

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The Definition of Supply

and Perfect Competition

Even if the conditions for a perfectly

competitive market are not met, 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 Firm and the Industry

The demand curve facing the firm is

different from the industry demand

curve

A perfectly competitive firm’s demand is

horizontal (perfectly elastic), even

though the demand curve for the

industry is downward sloping.

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Demand Curves for the Firm and the Industry

Each firm in a competitive industry is so small that it does not need to lower its

price in order to sell additional output

Market supply

Market demand 1,000 3,000

Market Demand Curve Versus

Individual Firm Demand Curve, Fig 11-1(a and b), p 236

10 20 30

Price

$10 8 6 4 2 0

Quantity

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The Profit-Maximizing Level

of Output

The goal of the firm is to maximize

profits

When it decides what quantity to

produce it continually asks how

changes in quantity would affect its

profit

Profit-Maximizing Level of

Output

Since profit is the difference between

total revenue and total cost, what

happens to profit in response to a

change in output is determined by

marginal revenue (MR) and marginal

cost (MC).

A firm maximizes profit when MC = MR.

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Profit-Maximizing Level of

Output

in total revenue associated with a

change in quantity

Marginal cost (MC) is the change in

total cost associated with a one unit

change in quantity

Marginal Revenue

Since a perfect competitor accepts the

market price as given, for a perfectly

competitive firm marginal revenue is

equal to price (MR = P).

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Marginal Cost

Initially, marginal cost falls and then

begins to rise

How to Maximize Profit

To maximize profits, a firm should

produce where marginal cost equals

marginal revenue

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How to Maximize Profit

If marginal revenue does not equal

marginal cost, a firm can increase profit

by changing output

The supplier will continue to produce as

long as marginal cost is less than

marginal revenue

How to Maximize Profit

The supplier will cut back on production

if marginal cost is greater than marginal revenue

of a competitive firm is MC = MR = P.

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Marginal Cost, Marginal

Price = MR Quantity Total Cost Marginal Cost

C

Area 1

P = D = MR

Costs

1 2 3 4 5 6 7 8 9 10 Quantity

60 50 40 30 20 10 0

A

MC

Marginal Cost, Marginal

Area 2

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The Marginal Cost Curve Is

the Supply Curve

The marginal cost curve, above the

point where price exceeds average

variable cost, is the firm's supply curve

The Marginal Cost Curve Is

the Supply Curve

The MC curve tells the competitive firm how much it should produce at a given

price

The firm can do no better than

producing the quantity at which

marginal cost equals price which in turn equals marginal revenue

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The Marginal Cost Curve Is the

Firm’s Supply Curve, Fig 11-3, p 239

Firms Maximize Total Profit

Firms maximize total profit, not profit

per unit

As long as an increase in output yields

even a small amount of additional profit,

a profit-maximizing firm will increase

output

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Profit Maximization Using

Total Revenue and Total Cost

Profit is maximized where the vertical

distance between total revenue and

total cost is greatest

At that output, MR (the slope of the total revenue curve) and MC (the slope of

the total cost curve) are equal

TC TR

0

$385

350 315 280 245 210 175 140 105 70 35

Quantity

1 2 3 4 5 6 7 8 9

Profit Determination by Total

Cost and Revenue Curves, Fig 11-4b,

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Total Profit at the

Profit-Maximizing Level of Output

While 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 Loss From a Table of Costs

Profit can be calculated from a table of

costs and revenues

Profit is determined by total revenue

minus total cost

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Determining Profit and Loss From a Table of Costs

The profit-maximizing output choice is

not necessarily a position that

minimizes either average variable cost

or average total cost

It is only the choice that maximizes total profit

Costs Relevant to a Firm, Table 11-1, p

241

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241

Determining Profit and Loss From a Graph

Find output where MC = MR.

The intersection of MC = MR (P)

determines the quantity the firm will

produce if it wishes to maximize profits

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Determining Profit and Loss From a Graph

Find profit per unit where MC = MR

To determine maximum profit, you must first determine what output the firm will

choose to produce

See where MC equals MR, and then

draw a line down to the ATC curve

This is the profit per unit

(a) Positive economic profit (b) Zero economic profit (c) Economic loss

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Zero Profit or Loss Where

Zero Profit or Loss Where

MC=MR

In all three cases (profit, loss, zero

profit), determining the

profit-maximizing output level does not

depend on fixed cost or average total

cost, but only where marginal cost

equals price

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The Role of Profits as Market

Entry Resources are drawn into the industry.

π = 0 Zero economic profit,

Zero profit, or Normal profit

Static The industry is in long run equilibrium.

π < 0 Economic loss Exit Resources leave

the industry.

The Shutdown Point

The firm will shut down if it cannot cover variable costs

A firm should continue to produce as long

as price is greater than average variable

cost.

Once price falls below that point it will be

cheaper to shut down temporarily and save the variable costs.

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The Shutdown Point

which the firm will be better off by

shutting down than it will if it stays in

business

The Shutdown Point

As long as total revenue is more than

total variable cost, temporarily

producing at a loss is the firm’s best

strategy since it is taking less of a loss

than it would by shutting down (loss

minimization)

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MC

P = MR

Price 60 50 40 30 20 10 0

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Short-Run Market Supply

and Demand

While the firm's demand curve is

perfectly elastic, the industry demand is downward sloping

Industry supply is the sum of all firms’

supply curves

Short-Run Market Supply

and Demand

In 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' marginal cost curves

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Short-Run Market Supply

and Demand

Since 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 the market

The market supply

In the long run, the number of firms may change in response to market signals,

such as price and profit

As firms enter the market in response

to economic profits being made, the

market supply shifts to the right

As economic losses force some firms

to exit, the market supply shifts to the

left

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made

Only zero economic profit will stop

entry

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Long-Run Competitive

Equilibrium

Zero profit does not mean that the

entrepreneur does not get anything for

his efforts

Long-Run Competitive

Equilibrium

In order to stay in business the

entrepreneur must receive his

opportunity cost or normal profits (the

amount the owners of business would

have received in the next-best

alternative)

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Long-Run Competitive

Equilibrium

Economic profits are profits above

normal profits

Long-Run Competitive

Equilibrium

Even if some firm has super efficient

workers or machines that produce rent,

it will not take long for competitors to

match these efficiencies and drive down the price, until all economic profits are

eliminated

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Long-Run Competitive

Equilibrium

The zero profit condition is enormously

powerful

As long as there is free entry and exit,

price will be pushed down to the

average total cost of production

Adjustment from the Short

Run to the Long Run

Industry supply and demand curves

come together to lead to long-run

equilibrium

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An Increase in Demand

An increase in demand leads to higher

prices and higher profits

Existing firms increase output and new

firms will enter the market, increasing

industry output still more, price will fall

until all profit is competed away

An Increase in Demand

If the the market is a constant-cost

industry, the new equilibrium will be at

the original price but with a higher

market output

A market is a constant-cost industry if

the long-run industry supply curve is

perfectly elastic (horizontal)

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An Increase in Demand

The original firms return to their original output but since there are more firms in the market, the total market output

increases

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Profit

$9

1012 0

Firm Price

Quantity

B A

Long-Run Market Supply

Two 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.

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An Increasing-Cost Industry

If inputs are specialized, factor prices

are likely to rise when the increase in

the industry-wide demand for inputs to

production increases

An Increasing-Cost Industry

This rise in factor costs would raise

costs for each firm in the industry and

increase the price at which firms earn

zero profit (break even)

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An Increasing-Cost Industry

Therefore, in increasing-cost industries, the long-run supply curve is upward

sloping

A Decreasing-Cost Industry

If input prices decline when industry

output expands, individual firms' cost

curves shift down

The price at which firms break even

now decreases, and the long-run

market supply curve is downward

sloping

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An Example: Canadian Retail Industry

During the 1990s the Canadian retail

industry illustrated how a competitive

market adjusts to changing market

conditions

An Example: Canadian Retail Industry

Many retailers were lost or absorbed by competitors: Eaton’s, Bretton’s,

Pascal’s, Robinson’s, K-Mart and many others

Initially, these firms saw their losses as the temporary result of reduced demand

in a slowing economy

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An Example: Canadian Retail Industry

As prices fell, P=MR fell below their

ATC

But since price remained above the

AVC, many firms closed their less

profitable locations and continued to

operate