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Perfect Competition

Perfect Competition. Econ 10 Holmes. Road Map. Costs. Definition. Graphs. Tables. Definition. Perfect Competition is the Industry Structure characterized by many, many firms each firm has no independent effect on the market price (price taker) homogeneous goods

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Perfect Competition

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  1. Perfect Competition Econ 10 Holmes

  2. Road Map Costs Definition Graphs Tables

  3. Definition • Perfect Competition is the Industry Structure characterized by • many, many firms • each firm has no independent effect on the market price (price taker) • homogeneous goods • perfectly elastic demand (for a particular firm’s good) • Common examples: • produce stand

  4. The demand for a particular firm’s good Market (Tomatoes) Firm (Farmer Joe’s Tomatoes) $ P S d D q Q

  5. Road Map Costs Definition Graphs Tables

  6. Perfect Competition:Generic Cost Curves MC $ ATC AVC Q

  7. Perfect Competition:Condition I: P>ATC MC $ ATC D AVC Where does P=MC? Q

  8. Perfect Competition:Condition I: P>ATC MC $ ATC D AVC Q

  9. Perfect Competition:Condition I: P>ATC PROFIT MC $ ATC D TR AVC TC P>ATC==> Profit P>AVC==> Stay Open Q

  10. Perfect Competition:Condition II: AVC< P < ATC MC $ ATC AVC D Where does P=MC? Q

  11. Perfect Competition:Condition II: AVC< P < ATC MC $ ATC AVC D Q

  12. Perfect Competition:Condition II: AVC< P < ATC LOSS MC $ ATC AVC D TFC TC TVC P<ATC==> Loss P>AVC==> Stay Open Q

  13. Perfect Competition:Condition III: P<AVC MC $ ATC AVC Where does P=MC? D Q

  14. Perfect Competition:Condition III: P<AVC MC $ ATC AVC Where does P=MC? D Q

  15. Perfect Competition:Condition III: P<AVC MC $ ATC AVC TFC TC LOSS if firm produces D TVC P<ATC==> Loss P<AVC==> Better to close Q

  16. Two ways to figure “I should shut down” Continue to operate if….

  17. Road Map Costs Definition Graphs Tables

  18. Tables Remember when we did all those cost tables? W=$12, TFC=$15 Now, in order to determine where the firm should operate, need to know... P=$4 Where does P=MC? A: Q=17 Profit = TR- TC = $4 * 17 - 63 = 68-63 = 5 Firm should (obviously) not shut down.

  19. TablesCondition I W=$12, TFC=$15, P=$4 Note that (indeed, just as we claimed) profit is maximized at P=MC. Why is here better than here? Answer: normal profit/opp cost

  20. Perfect Competition:Condition I: P>ATC PROFIT MC $ ATC D TR AVC TC P>ATC==> Profit P>AVC==> Stay Open Q

  21. TablesCondition II Suppose P = $3 W=$12, TFC=$15, P = $3 P=MC at Q=14==> profit = 42 - 51 = -9 (loss of 9) but stay open (9<15) Profit is maximized at the largest Q where P=MC. Compare here and here (P=MC at both)

  22. Perfect Competition:Condition II: AVC< P < ATC LOSS MC $ ATC TC AVC D TR P<ATC==> Loss P>AVC==> Stay Open Q

  23. TablesCondition III Suppose P = $2 W=$12, TFC=$15, P = $2 P=MC at Q=10==> profit = 20 - 39 = -19 (loss of 19) Now should close (19>15) Note that 1. Loss at Q>0 where P=MC > TFC 2. TR<TVC

  24. Perfect Competition:Condition III: P<AVC LOSS MC $ ATC AVC TC D TR P<ATC==> Loss P<AVC==> Better to close Q

  25. Road Map Costs Definition Graphs Tables

  26. Your Turn Wage = $30, TFC=$60, P=$3 Wage = $24, TFC = $60, P =$12 What is best Q>0? Profit/loss at this Q? Should firm shut down? Sketch the graph. What if TFC = $110? What does this do to the best Q>0 and the shutdown decision?

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