Perfect Competition 3

1. Perfect Competition 3

2. Starter - Coal Read article on Coal Industry Which characteristics of perfect competition does the coal market have? Which characteristics does it not meet?

3. Quick questions�. Which characteristics of perfect competition does the coal market have? Which characteristics does it not meet? If facing a loss, a PC firm might prefer to leave the market than take the losses! Which characteristics of perfect competition does the coal market have? Homogenous product albeit different grades Perfect knowledge with easy access o mining technology and price info. Large number of potential buyers in the world marketplace Plenty of alternative suppliers from other countries Easy substitutes � oil and gas Which characteristics does it not meet? If facing a loss, a PC firm might prefer to leave the market than take the losses! Which characteristics of perfect competition does the coal market have? Homogenous product albeit different grades Perfect knowledge with easy access o mining technology and price info. Large number of potential buyers in the world marketplace Plenty of alternative suppliers from other countries Easy substitutes � oil and gas Which characteristics does it not meet? If facing a loss, a PC firm might prefer to leave the market than take the losses!

4. Lesson objectives Analyse diagrammatically the behaviour of firms in a PC market structure Recap on how to answer questions and recognising trigger words Investigate firms� costs under perfect competition Explain the meaning and implication of shut down point

5. No peeking� Draw the long run output diagram for a firm operating in a perfectly competitive environment I�ll start you off�

6. Many small firms each of whom produces an insignificant percentage of total market output and thus exercise no control over the market price

7. Long run equilibrium

8. Recap What does earning �normal profit� mean? What will the concentration ratio be for firms operating in perfect competition? Do firms in perfectly competitive markets make a loss? Why is perfect competition rare in reality?

9. Perfect Competition � SR Abnormal loss Draw the diagram Show the industry position and the firm position I�ll start you off�

10. Abnormal losses�

11. Long Run Equilibrium

12. Essay Technique

13. To what extent�. Pick one question to answer in the next 5 minutes�. �does attending all AS Economics lessons guarantee you an A grade at A level? �does having Didier Drogba back in the Chelsea team guarantee them this year�s Premiership?

14. Trigger words

15. Answer Structure Introduction Option A Option B Conclusion

16. Answer Structure Introduction Option A Option B Conclusion

17. To what extent does the dairy market reflect the characteristics of Perfect Competition?

18. Shut down point

19. 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 affect profit.

20. 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).

21. Profit-Maximizing Level of Output Marginal revenue (MR) � the change in total revenue associated with a change in quantity.

22. Marginal Revenue Since a perfect competitor accepts the market price as given, for a competitive firm, marginal revenue is price (MR = P).

23. Marginal Cost Initially, marginal cost falls and then begins to rise. Marginal concepts are best defined between the numbers.

24. How to Maximize Profit To maximize profits, a firm should produce where marginal cost equals marginal revenue.

25. How to Maximize Profit If marginal revenue does not equal marginal cost, a firm can increase profit by changing output.

26. How to Maximize Profit The supplier will cut back on production if marginal cost is greater than marginal revenue.

27. Marginal Cost, Marginal Revenue, and Price

28. The Marginal Cost Curve Is the Supply Curve The marginal cost curve is the firm's supply curve above the point where price exceeds average variable cost.

29. The Marginal Cost Curve Is the Supply Curve The MC curve tells the competitive firm how much it should produce at a given price.

30. The Marginal Cost Curve Is the Firm�s Supply Curve

31. Firms Maximize Total Profit When we speak of maximizing profit, we refer to maximizing total profit, not profit per unit. Firms do not care about profit per unit; as long as an increase in output will increase total profits, a profit-maximizing firm should increase output.

32. 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.

33. Profit Determination Using Total Cost and Revenue Curves

34. 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.

35. 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.

36. Determining Profit and Loss From a Table of Costs The profit-maximizing position is not necessarily a position that minimizes either average variable cost or average total cost.

37. Costs Relevant to a Firm

38. Costs Relevant to a Firm

39. 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.

40. Determining Profit and Loss From a Graph Find profit per unit where MC = MR.

41. Determining Profits Graphically

42. Zero Profit or Loss Where MC=MR Firms can also earn zero profit or even a loss where MC = MR. Even though economic profit is zero, all resources, including entrepreneurs, are being paid their opportunity costs.

43. 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, by only where marginal cost equals price.

44. Shut down point

45. The Shutdown Point The firm will shut down if it cannot cover average 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 makes sense to shut down temporarily and save the variable costs.

46. The Shutdown Point The shutdown point is the point at which the firm will gain more by shutting down than it will by staying in business.

47. 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.

48. The Shutdown Decision

49. Homework Exercise 2.2 on costs Due tomorrow!

50. Plenary Analyse diagrammatically the behaviour of firms in a PC market structure Recap on how to answer questions and recognising trigger words Investigate firms� costs under perfect competition Explain the meaning and implication of shut down point