110 likes | 204 Views
PERFECTLY COMPETITIVE MARKETS. MAIN ASSUMPTION OF PERFECT COMPETITI ON. · many small firms ( too small to affect the market price ) · identical product · f ree entrance in wards and out wards the market (no barriers) · perfect information
E N D
MAIN ASSUMPTION OF PERFECT COMPETITION • · many small firms (too small to affect the market price) • · identical product • ·free entrance inwards and outwards the market (no barriers) • · perfect information • ·firms produce and sell their output at given market prices èfirms are so called „price-takers“ è under such conditions, each producer faces a completely horizontal demand curve
Revenues in perfect competition • Total revenues depend exclusively on the quantity of production and are directly proportional to it • AR are constant èthe AR curve is straight line parallel with the X-axis at the level of given price • MR curve is identical to AR curve
COMPETITIVE SUPPLY • A typical perfect competitor will be able to sell any amount of output at the going market price. Under perfect competition, a profit-maximizing firm will set its production at the level where marginal cost equals price • P = MC • what will happen, if the market price changes? – when increases, it will cause the change in firms optimal output along the rule P = MC è this means that a firm’s marginal cost curve is also its supply curve!
Relative, Absolute loss and Opportunity cost • Relative loss – decline in achieved profit by producing more than is optimal, • Absolute loss – real loss in case the total costs exceed the total revenue, • Opportunity cost – in case firm produce less Q than corresponds to economic equilibrium.
THE SHOTDOWN CONDITION – IN THE SHORT RUN • the critically low market price at which revenues just equal variable cost (or at which losses exactly equal fixed costs) is called the SHUTDOWN POINT • – for prices above the shutdown point, the firm will produce along its marginal cost curve, for prices below the shutdown point, the firm will produce nothing at all
BREAKEVEN POINT • price is equal to AC, means total revenues just cover total costs • in a long run is unacceptable the situation, where the total cost are higher than total revenues (and the price lower than AC), because firms would tend to leave this market è the long-run breakeven condition comes at a critical P where identical firms just cover their full competitive costs • - the long-run equilibrium condition of firm can be summed up: • MR = MC = AC = AR, alias P = MC = AC
THE EFFICIENCY OF COMPETITIVE MARKETS • 1. P = MUEverybody gains P utils of satisfaction from the last unitof good • 2. P = MC The price of good exactly equals the MC of the last unit of good supplied • 3. MU = MC The marginal gains to society from the last consumed unit equal to the marginal costs to society of that last unit produced, which guarantees that a competitive equilibrium is efficient.
Tasks: • Compare the price and quantity produced in perfect competition in the short- and long-run. Price of the short run is 15,- EUR, set the price of the long run. • Decide about the optimal quantity of production and the shotdown point of perfectly competitive firm in the short run knowing: the price 95,- Eur, fixed costs = 2 and