Essay on microeconomic KT103H PERFECTLY COMPETITIVE MARKET

That is, at the point where marginal cost equals selling price, the firm will maximize profit.3.3 The short-run supply curve of a perfectly competitive firm The firm will use the margina

Can Tho University

School of economics

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-Essay on Microeconomic KT103H

PERFECTLY COMPETITIVE MARKET

Full Name: Ton Anh Kiet

Student code: B2006299

Class: 20W4F3-C6 :

School year 2021-2002-Semeter 1

Can Tho: 2021

CHAPTER I INTRODUCTION

In the production of goods, profit is the highest economic goal, a cond ion for the existence and development of enterprises To provide goods and services to the market, businesses must invest capital in the production and business process They want the cost of inputs to be minimal and sell goods at the highest price ie allEvery business wants to maximize profits In a perfectly competitive market, the prices of goods and services in the market are determined by the supply and

demand of the entire market Each seller itself cannot control the price of the item they supply in the market Thus, under perfect competition each seller is a price taker Unable to self-regulate market prices What should a perfectly competitive firm do to maximize profits? How should they adjust the amount of goods supplied

to the market to ensure maximum profit for the business when the market price changes in both the short and long term? The reason that the author chooses a perfectly competitive market is given to readers because our country is a

developing country, most of the businesses are participating in this market, the author wants to provide some knowledge for you to read understand more about it.The author's target audience is economics students or those who are interested in economics and you want, have been, and are participating in starting a business In the scope of this discussion, we would like to present the scientific basis for

enterprises to make effective supply decisions in accordance with price fluctuations

in the market in the short-term and long-term production periods when they do business in a perfectly competitive market

CHAPTER II THEORETICAL BASIS

II.1 THE BASIC CONCEPTS

An enterprise is a unit that trades in goods and services according to market and social demands in order to maximize profits and achieve the highest socio-

Demand reflects the quantity of a good or service that buyers are willing and able

to buy at different prices in a given period, assuming all other things constant.Quantity demanded is the specific quantity of a good or service that buyers are willing and able to buy at a given price in a given period (assuming other things remain constant)

The demand function is an algebraic expression that represents the relationship between the quantity demanded of an item and its price

Supply reflects the quantity of a good or service that sellers are willing and able to sell at different prices in a given period (assuming all other things constant)

Quantity supplied is the specific amount of a good or service that sellers are

willing and able to sell at a given price during a given period (assuming other things remain constant)

The supply function is an algebraic expression that represents the relationship between the supply of an item and its price

Supply and demand equilibrium is the state of the market where the quantity supplied equals the quantity demanded (a state in which there is no pressure to cause price or output to change)

The short run is the period in which at least one factor of production cannot be changed, also known as a fixed factor

The long run is the time period in which all inputs are subject to change

The average product of an input is the average number of products produced by a unit of input in a given time.

The marginal product of an input is the change in total output when the input changes by one unit

Production cost is the total cost to serve the production and business process that

an enterprise has to spend and incur in a certain period of time

Economic cost is the total cost of using economic resources in the production and business process in a certain period of time

Short-term production costs are the costs that businesses have to incur when

conducting production and business in the short term

Total long-run costs include all costs incurred by a business to produce and sell goods or services if the inputs of the production process can be adjusted

Long-run average cost is the average cost per unit produced in the long run

The long run marginal cost is the change in total cost resulting from producing one more unit of output in the long run

Profit is the difference between total revenue and total cost of production

Marginal revenue is the change in total revenue when one more unit is sold

II.2 CHARACTERISTICS OF A PERFECTLY COMPETITIVE MARKET

- There are infinitely many independent buyers and sellers

+ A perfectly competitive market requires a large number of buyers and sellers, each of whom acts independently of all the others

+ The number of sellers and buyers is said to be multiple, when the normal transactions of one buyer or seller have no effect on the price at which the

transactions are made

- All units of exchange are considered to be the same

This feature is practically conspicuous in the market For example, the coal market is of the same quality, or the gasoline market each unit is a copy of any other Therefore, buyers never have to care who they buy those units from

- All buyers and sellers have full knowledge of the information related to the exchange

A perfectly competitive market requires that all buyers and sellers have contact with all potential exchangers, knowing all the features of the items of exchange; know all the prices demanded by the seller and the price paid by the buyer People are closely related to each other and the communication between them is continuous.

- There is nothing to prevent entry and exit from the market

The market is perfectly competitive at any given time, each person must be free to be a buyer or seller, free to enter the market, and be exchanged at the same price as prevailing exchangers Likewise, it requires that there be no obstacle preventing someone from being a buyer or a seller in the market and therefore withdrawing from the market

II.3 PERFECTLY COMPETITIVE FIRM

3.1 Basic characteristics of perfect competition behavior

A perfectly competitive firm can sell all of its output at the prevailing market price.firms are small relative to the same market, so the firm has no appreciable effect ontotal output or market prices Therefore, a perfectly competitive firm has absolutely

no market power, that is, the inability to control the market price for the product it sells, who must accept the market price Individually competitive firms can sell off their output at prevailing market prices This is characteristic of firms' lack of market power All competing firms have no independent influence on market prices A perfectly competitive firm's output is too small for the market capacity, soits output decisions have no appreciable effect on price A perfectly competitive firm faces a horizontal demand curve for its output

DIAGRAM

Figure 5.1

3.2 Output of a perfectly competitive firm

It is noted that if the market has many sellers and many buyers, but there are a few sellers and a few buyers with the majority of output, the increase or decrease in its output affects the whole market market cannot be called a perfectly competitive market

Figure 5.2

A perfectly competitive firm will determine output at the point where the

difference between revenue and costs is greatest In the figure above, since selling price is constant with output, the revenue curve is a straight line In practice, often selling prices are fixed over time periods such as weeks, months, and years, so in

the short run, the sales revenue curve of every company is a linear straight line The cost curve also follows the law of businesses in general that is the curve has anincreasing slope At the origin, when no unit has been produced (q=0), there is no revenue but fixed costs (FC) At A is when revenue equals costs, called breakeven point At B is when the difference between revenue and cost is the largest, this is the point to stop At point B, marginal revenue MR equals marginal cost MC; where MR=P -> at this point MC=P That is, at the point where marginal cost equals selling price, the firm will maximize profit.

3.3 The short-run supply curve of a perfectly competitive firm

The firm will use the marginal condition (MR = MC) to find the level of output that maximizes profit In the short run, firms will choose the level of output at which MR = SMC, where SMC is the short-run marginal cost A special feature of perfect competition is the relationship between marginal revenue and selling price Since the demand curve is horizontal, for every additional unit a firm sells, it will receive an additional amount equal to the price of the product

In a perfectly competitive market, marginal revenue equals the price of the

C, respectively

Figure 5.3 Deciding to provide the application within the short term of the

businessSuppose the firm is facing a horizontal demand curve at price P in Figure 5.3, and 4the firm will choose the output Q corresponding to point D because at that point 4price equals marginal cost When the product price is at P or higher, that is, the 3price is greater than the minimum average cost, the firm will choose an output level corresponding to a certain point on the SMC curve from point C upwards, then price is greater than average cost For example, if the price is P , the firm 4produces at output Q Then the average cost is SAC The firm makes a profit in 4 4the short run because then price (P ) is higher than average cost (SAC ) Similarly, 4 4corresponding to a certain price, the enterprise will rely on the SMC curve to choose the optimal output level When the price is at P , the firm will choose the 3output level corresponding to the point C on the SMC curve, which is also the minimum point of the SAC curve Now that the price is equal to the minimum average cost, the firm will produce Q output and then the firm will break even 3Therefore, we also call the price P the breakeven price In between points A and C,3 the business incurs a loss because the price is below average cost However, if the price is between P and P , the enterprise can partially cover the fixed costs, so the 1 2business continues to produce For example, when the price is P , the firm will 2produce the output corresponding to point B on the SMC of Q Why is the 2

business losing money but still not withdrawing from the industry? A business can

operate and incur losses in the hope that in the future the price of the product will increase or it can reduce the cost of production so that the business can earn a profit in the future In fact, businesses can choose one of two options: continue production or temporarily close Enterprises will choose which option is more profitable If not producing, the business will suffer a loss of fixed costs If the business continues to produce, only a part of its fixed costs will be lost At that time, the price is lower than average total cost (P < SAC) but still higher than average variable cost (P > SAVC), so the enterprise can cover variable costs (VC) and part of the cost excess compared to SAVC can be used to partially offset fixed costs The firm will produce at any price higher than P (which is also the 1

minimum average variable cost) because at those prices the firm will cover run variable costs and which can cover fixed costs The business will stop working when the price is lower than P because then if it continues to produce, the business1will not even cover enough variable costs and will suffer a heavier loss than if it stopped production The price P is called the closing price or the starting price of 1production At different prices, the firm will choose the output level corresponding

short-to the points on the SMC curve at that price In other words, the points on the SMCcurve indicate the amount of output that the firm will supply at certain prices Therefore, we can call the SMC curve the firm's short-run supply curve However, the firm only starts production when the price is from minimum average variable cost upwards, so the supply curve exists only above point A, where the SMC curve crosses the lowest point on the SAVC curve Let us consider an example of a short-run supply decision of a firm operating in a perfectly competitive market to better understand the firm's decision-making process

3.4 The long-term supply of business

In this section, we study the concept of long term Long-term is a time long enoughfor enterprises operating in the industry to change their output, production scale or leave the industry; at the same time, new firms can enter the industry Figure 5.4 shows how the firm's supply decisions in the long run are made At one point in theshort run, the firm's demand curve is horizontal at the price P With the SAC and 0SMC lines as shown in Figure 5.4, the firm earns a positive profit That is the area

of rectangle ABCD The firm produces output q , sells it at P , and has an average 1 0cost corresponding to point B on the SAC curve If the firm believes that the

market price will be maintained at P , it will want to increase the size of its factory 0

to earn more profit At this point, the firm has the long-run average and marginal cost curves LAC and LMC We also note that the LAC curve will touch the

minimum of the SAC and the LMC will pass through the minimum of the LAC The firm will choose an output level q corresponding to point E on the LMC 3curve So, when the factory expansion is completed, the profit of the business will

be the DEFG area We also see that the higher the price, the higher the profit of the firm, and vice versa, if the price falls The firm will close and leave the industry if the price is below P , which corresponds to the minimum long-run average cost 1(note that in the long run all costs are variable costs) The same principles as in the short run can be applied to establish the long run supply curve of a firm in perfect competition At large prices at minimum average cost (prices greater than P ), the 1firm makes a profit and will produce In the long run firms leave the industry whenprices do not cover the long-run average cost LAC Those are the prices lower thanthe price P Therefore, the firm's long-run supply curve is the part of the LMC 1curve to the right of point H corresponding to the price P At price P , the firm 1 1produces q The firm then just covers the economic costs, or the firm earns a profit2that is normally equal to the opportunity cost of capital and time for the business owner

Figure 5.4 Long-term supply decisions of enterprises

3.5 Industry enterprises, exports and long-term equality of perfect competitive industry

Figure 5.4 shows that when the price is P , the firm will increase output and 0cause profits to increase as the firm expands The firm's positive economic profit means that this is an unusually high profit (super profit) High profits will stimulate investors to shift resources from other industries to this

industry, ie, there will be new businesses entering the industry Due to the entry of the industry, the output of the industry increases, causing the

industry supply curve to shift to the right The equilibrium price in the market will decrease On the other hand, when there is entry into the

industry, the number of firms in the industry increases, increasing the

demand for inputs That increases the prices of inputs and thus makes

production more expensive Taken together, we see that the entry of new firms reduces the profitability of firms in the industry Economic profits of enterprises will gradually decrease to zero, then there will be no incentive for new businesses to enter the industry anymore Figure 5.5 illustrates this

Figure 5.5 Long-run competitive equilibriumFigure 5.5a shows the firm's supply decision in the long run When the price is at

P0, the firm produces q and makes a profit This profit spurred other firms to enter0the industry and caused the long-run point in the market to move from point E to E'

in Figure 5.5b The price will fall to P , which is equal to the minimum average2cost of the firm Note that this price P will be higher than the price P in Figure 5.42 1because of increased production costs due to the entry of the industry as shown

above The firm will produce output q to maximize profit However, at q output,1 1firms only break even, so there is no incentive for new firms to enter the industry.

We say the industry is in equilibrium in the long run At this point, the economicprofit of businesses is zero Zero economic profit does not mean that competingfirms are inefficient, but only that it is a competitive industry The price P2corresponding to the lowest point on the LAC is called the entry or exit price of theindustry Thus, long-run competitive equilibrium occurs when the following threeconditions are satisfied First, all firms in the industry are producing at a profit-maximizing output level Second, no firm has an incentive to enter or exit anindustry because firms in the industry earn zero economic profit Third, the price ofthe product is at the level at which industry supply equals consumer demand Inpractice, firms in the industry have different cost curves Some firms have patents,inventions, or ideas that reduce production costs or have better improvedproduction technology, so they may have a lower cost curve than other firms in theindustry This means that in the long run equilibrium these firms can earn higherprofits than other firms As long as other businesses don't have patents, inventions

or ideas to lower costs, etc they have no incentive to enter the industry Patentsbring profits to businesses, other businesses will be willing to pay to get thisinvention or buy the whole business to get that invention or invention Therefore,the value of the patent will increase, which is the opportunity cost of the business -the business can sell the copyright to another enterprise without using it But if allfirms are equally efficient, and when opportunity costs are taken into account, thefirm's economic profit falls to zero

3.6 Industry’ supply curve

A competitive industry consists of many businesses In the short run, there are twofixed factors: a fixed number of inputs to the firm and the number of firms in theindustry In the long run, each firm can change all factors of production and at thesame time the number of firms also changes due to the import or export of theindustry

3.6.1 The industry's short-run supply curve

Just as the individual demand curves are aggregated into the market demand curve,the industry supply curve is also constructed by adding up all the supply curves ofthe firms in the industry Figure 5.6 depicts how the industry's short-run supplycurve is aggregated At each price, we add up the quantity supplied by each firm toget the quantity supplied by the industry as a whole at that price In the short run,the number of businesses is fixed We assume a competitive industry with only two

firms A and B Each firm has a supply curve that is the fraction of the SMC curveabove the closing price Firm A has a lower closing price than Firm B, P1 compared

to P , possibly because Firm A has a more favorable geographical location or has2more advanced technology At prices lower than P , no firm produces At prices1between P and P , only firm A produces, so the industry's output is also firm A's1 2output The portion of the industry supply curve from prices P to P is also the1 2portion of the industry's supply curve Firm A At the price P , Firm B starts2production at a level of output (q2)B , so the industry's output is q =(q + (q

The industry supply curve is interrupted at price P At prices greater than P , the2 2industry's quantity supplied is the sum of qA and qB For example, at price P3: q =3(q3)A

+( q ) Thus, the industry supply curve is the horizontal summation of the3 Bdiscrete supply curves When there are many firms with different closing prices,the industry supply curve will have many small discontinuities In fact, since theoutput of each competitive firm is very small relative to the industry as a whole,the discontinuity is negligible, so we can draw the industry's supply curve as asolid line Each firm has an upward supply curve, so the industry supply curve willalso go up We note, the supply curve of the industry will be flatter than the supplycurve of each firm, so the supply of the industry is more elastic than the supply ofeach firm

a)The supply curve of firm A b) The supply curve of firm B c) Industry supply curve

Figure 5.6 Aggregate industry supply curve

3.6.2 The industry's long-run supply curve

Figure 5.6 can also be used to represent the aggregate long-run industry supplycurve In the short run as well as in the long run, the industry supply curve is thehorizontal aggregate of the supply curves of all firms However, in the long run,there is an export or import of the industry, so it is difficult to determine thenumber of firms in the industry when prices change Therefore, we must assess the

potential of enterprises to enter and exit the industry when prices change Theindustry's long-run supply curve is the horizontal sum of the supply curves ofexisting firms in the industry and those with potential for entry and exit into theindustry At a price lower than P in Figure 5.6, firm B can exit the industry in the2long run Conversely, when the price is higher than P , firm B will want to enter the2industry When the market price increases, the total supply of the industry increases

in the long run for two reasons: (i) existing firms will produce and supply moreproducts to the market, and (ii) new firms will feel Seeing that he could make aprofit, he entered the industry, so it also increased the supply in the market.Conversely, when prices fall, firms with high costs will lose money and exit theindustry Industry supply will decrease significantly when prices fall

Figure 5.7 Industry short-run and long-run supply curvesFigure 5.7 illustrates the above argument about the industry's short-run and long-run supply curves The industry's long-run supply curve (LRSS) is flatter than theindustry's short-run supply curve (SRSS) for two reasons: (i) firms can adjust theirinputs appropriately so we have a more comfortable long term; and (ii) higherprices will attract firms to enter the industry, causing the industry's output toincrease more than the output growth of existing firms At different price levels,there will be imports or exports that cause industry output to change more in theshort run Therefore, supply in the long run is more elastic than supply in the shortrun

3.6.3 The industry's long-run horizontal supply curve

Each firm has an upward-sloping LMC curve, so its long-run supply curve slopesupward The industry's long-run supply curve is slightly flatter than the individual