Chapter 7 - Pure competition. Explanations and characteristics of the four models are outlined at the beginning of this chapter, then the characteristics of a purely competitive industry are detailed. There is an introduction to the concept of the perfectly elastic demand curve facing an individual firm in a purely competitive industry. Next, the total, average, and marginal revenue schedules are presented in numeric and graphic form.
Trang 1Pure Competition
Chapter 7
Trang 3• Very large numbers of sellers
• Standardized product
• “Price takers”
• Easy entry and exit
• Perfectly elastic demand
• Firm produces as much or little as they
want at the price
• Demand graphs as horizontal line
Trang 4$131 131 131 131 131 131 131 131 131 131
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74
Trang 6Approach
• What economic profit (loss) will be
realized?
76
Trang 7Approach
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The Profit-Maximizing Output for a Purely Competitive Firm: Marginal
Revenue– Marginal Cost Approach (Price = $131)
(3)Average Variable Cost (AVC)
(4)Average Total Cost(ATC)
(5)Marginal Cost(MC)
(5)Price = Marginal Revenue(MR)
(6)Total Economic Profit (+)
Trang 8A=$97.78
78
Trang 9• Still produce because P > min AVC
MC
Trang 10Approach
LO3
The Profit-Minimizing Output for a Purely Competitive Firm: Marginal
Revenue– Marginal Cost Approach (Price = $81)
(3)Average Variable Cost (AVC)
(4)Average Total Cost(ATC)
(5)Marginal Cost(MC)
(5)Price = Marginal Revenue(MR)
(6)Total Economic Profit (+)
Trang 11A=$91.67
V = $75
Trang 12LO3
The Profit-Minimizing Output for a Purely Competitive Firm: Marginal
Revenue– Marginal Cost Approach (Price = $71)
(3)Average Variable Cost (AVC)
(4)Average Total Cost(ATC)
(5)Marginal Cost(MC)
(5)Price = Marginal Revenue(MR)
(6)Total Economic Profit (+)
Trang 13MR = P
MC
AVC ATC
Trang 14The Supply Schedule of a Competitive Firm
Confronted with Cost Data
Price Supplied Quantity Maximum Profit (+) Minimum Loss (-)
Trang 15a b
Trang 16than, minimum average variable cost This means that the firm is profitable or that its losses are less than its fixed cost.
What quantity should this firm
produce?
Produce where MR (=P) = MC;
there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized.
Will production result in economic
profit? Yes if price exceeds average total cost (TR will exceed TC) No if
average total cost exceeds price (TC will exceed TR).
716
Trang 17Firm and Market Supply and the Market Demand
(1) Quantity Supplied, Single Firm
(2) Total Quantity Supplied, 1,000 Firms
(3) Product Price
(4) Total Quantity Demanded
Trang 19• Easy entry and exit
• The only long-run adjustment we
Trang 23• Constant-cost industry