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Firms in Competitive Markets

14. Firms in Competitive Markets. E conomics. P R I N C I P L E S O F. N. Gregory Mankiw. Premium PowerPoint Slides by Ron Cronovich. In this chapter, look for the answers to these questions:. What is a perfectly competitive market? 완전경쟁시장이란 ?

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Firms in Competitive Markets

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  1. 14 Firms in Competitive Markets Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich

  2. In this chapter, look for the answers to these questions: • What is a perfectly competitive market? 완전경쟁시장이란? • What is marginal revenue? How is it related to total and average revenue? 한계수입이란? 총수입 및 평균수입과의 관계는? • How does a competitive firm determine the quantity that maximizes profits? 경쟁기업은 이윤을 극대화하는 산출량을 어떻게 결정하나? • When might a competitive firm shut down in the short run? Exit the market in the long run? 단기에서 경쟁기업은 언제 조업을 중단하나? 장기에서의 시장퇴출은? • What does the market supply curve look like in the short run? In the long run? 단기에서의 시장공급공선은 어떤 모양? 장기에서는? 1

  3. Introduction: A Scenario Three years after graduating, you run your own business. 졸업 후 3년이 지나 당신이 사업을 한다고 하자. You must decide how much to produce, what price to charge, how many workers to hire, etc. 당신은 얼마나 생산하고, 가격을 얼마로 메기고, 노동자를 얼마나 고용해야 할 지 등을 결정해야 한다. What factors should affect these decisions? 이 결정에 영향을 미치는 요인들은 무엇? Your costs (studied in preceding chapter) 비용 How much competition you face 경쟁 We begin by studying the behavior of firms in perfectly competitive markets. 완전경쟁시장에서의 기업 행동에 대한 공부로 시작해보자. 0 FIRMS IN COMPETITIVE MARKETS

  4. Characteristics of Perfect Competition 1. Many buyers and many sellers. 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market. 0 • Because of 1 & 2, each buyer and seller is a “price taker” – takes the price as given. FIRMS IN COMPETITIVE MARKETS

  5. The Revenue of a Competitive Firm Total revenue (TR) Average revenue (AR) Marginal revenue (MR):The change in TR from selling one more unit. = P AR = ∆TR TR ∆Q Q MR = 0 TR = P x Q FIRMS IN COMPETITIVE MARKETS

  6. A C T I V E L E A R N I N G 1Calculating TR, AR, MR 0 Fill in the empty spaces of the table. Q P TR AR MR 0 $10 n/a 1 $10 $10 2 $10 3 $10 4 $10 $40 $10 5 $10 $50 5

  7. MR = TR AR = Q $0 $10 ∆TR $10 ∆Q $10 Notice that MR = P $20 $10 $10 $30 $10 $10 $10 $10 A C T I V E L E A R N I N G 1Answers 0 Fill in the empty spaces of the table. Q P TR= P x Q 0 $10 n/a 1 $10 $10 2 $10 3 $10 4 $10 $40 $10 5 $10 $50 6

  8. MR = P for a Competitive Firm A competitive firm can keep increasing its output without affecting the market price. 경쟁기업은 시장가격에 영향을 미치지 않은 채 자신의 산출량을 증대시킬 수 있다. So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P. 그래서 Q 각한 단위 증가는 수입을 P만큼 증가시킨다. 즉 MR=P다. 0 MR = P is only true for firms in competitive markets. MR=P는 경쟁시장에 있는 기업들에게만 옳다. FIRMS IN COMPETITIVE MARKETS

  9. Profit Maximization What Q maximizes the firm’s profit? 어떤 산출량이 기업의 이윤을 극대화하는가? To find the answer, “think at the margin.” 답을 찾기 위해서 “한계적으로 사고하라” If increase Q by one unit, 만약 Q가 한단위 증가하면, revenue rises by MR, 수입은 MR만큼 증가하고cost rises by MC. 비용은 MC만큼 증가한다. If MR > MC, then increase Q to raise profit. 만약 MR>MC라면 이윤의 증대를 위해 Q을늘여야 하고 If MR < MC, then reduce Q to raise profit. 만약 MR<MC라면 이윤의 증대를 위해 Q를 줄여야 할 것이다. 0 FIRMS IN COMPETITIVE MARKETS

  10. Profit Maximization –$5 $5 $4 $6 1 9 6 4 5 15 8 2 7 23 10 0 7 33 12 –2 5 45 0 (continued from earlier exercise) At any Q with MR > MC,increasing Q raises profit. MR>MC인 어떤 Q에서도 Q가 늘면 이윤은 증가 Q TR TC Profit MR MC Profit = MR–MC 0 $0 $10 1 10 10 2 20 10 At any Q with MR < MC,reducing Q raises profit. MR<MC인 어떤 Q에서도 Q가 줄면 이윤은 증가 3 30 10 4 40 10 5 50

  11. MC and the Firm’s Supply Decision At Qa, MC < MR. So, increase Qto raise profit. At Qb, MC > MR. So, reduce Qto raise profit. At Q1, MC = MR. Changing Qwould lower profit. Costs MC P1 MR Q Q1 Qa Qb 0 Rule: MR = MC at the profit-maximizing Q. FIRMS IN COMPETITIVE MARKETS

  12. MC and the Firm’s Supply Decision If price rises to P2, then the profit-maximizing quantity rises to Q2. The MC curve determines the firm’s Q at any price. Hence, MC P2 MR2 P1 MR Q2 Q1 0 Costs the MC curve is the firm’s supply curve. Q FIRMS IN COMPETITIVE MARKETS

  13. Shutdown vs. Exit Shutdown: 조업중단A short-run decision not to produce anything because of market conditions. 시장조건 때문에 단기적으로 생산을 중단하기로 결정 Exit: 퇴출A long-run decision to leave the market. 시장을 떠나려는 장기적 결정 A key difference: 핵심적인 차이 If shut down in SR, must still pay FC. 단기에 조업을 중단하더라도 고정비용은 부담해야 If exit in LR, zero costs. 장기에 퇴출한다면 비용은 0 0 FIRMS IN COMPETITIVE MARKETS

  14. A Firm’s Short-run Decision to Shut Down Cost of shutting down: revenue loss = TR Benefit of shutting down: cost savings = VC (firm must still pay FC) So, shut down if TR < VC Divide both sides by Q: TR/Q < VC/Q So, firm’s decision rule is: 0 Shut down if P < AVC FIRMS IN COMPETITIVE MARKETS

  15. The firm’s SR supply curve is the portion of its MC curve above AVC. A Competitive Firm’s SR Supply Curve Costs MC ATC If P > AVC, then firm produces Q where P = MC. AVC If P < AVC, then firm shuts down (produces Q = 0). Q 0 FIRMS IN COMPETITIVE MARKETS

  16. The Irrelevance of Sunk Costs Sunk cost: a cost that has already been committed and cannot be recovered 매몰비용이란 이미 집행되었고 회수불가능한 비용을 말한다. Sunk costs should be irrelevant to decisions; 매몰비용을 의사결정과 연관짓지 말아야 한다. you must pay them regardless of your choice. 선택과 상관없이 그것들은 지불되어야 하니까. FC is a sunk cost: The firm must pay its fixed costs whether it produces or shuts down. 고정비용은 매몰비용이다. 기업은 생산을 하든, 조업중단을 하든 고정비용을 지불해야 한다. So, FC should not matter in the decision to shut down. 따라서 고정비용은 조업중단의 결정에서 고려되어서는 안된다. 0 FIRMS IN COMPETITIVE MARKETS

  17. A Firm’s Long-Run Decision to Exit Cost of exiting the market: revenue loss = TR Benefit of exiting the market: cost savings = TC (zero FC in the long run) So, firm exits if TR < TC Divide both sides by Q to write the firm’s decision rule as: 0 Exit if P < ATC FIRMS IN COMPETITIVE MARKETS

  18. A New Firm’s Decision to Enter Market In the long run, a new firm will enter the market if it is profitable to do so: if TR > TC. Divide both sides by Q to express the firm’s entry decision as: 0 Enter if P > ATC FIRMS IN COMPETITIVE MARKETS

  19. The firm’s LR supply curve is the portion of its MC curve above LRATC. The Competitive Firm’s Supply Curve Costs MC Q 0 LRATC FIRMS IN COMPETITIVE MARKETS

  20. Costs, P MC P = $10 MR ATC $6 Q 50 A C T I V E L E A R N I N G 2Identifying a firm’s profit 0 A competitive firm Determine this firm’s total profit. Identify the area on the graph that represents the firm’s profit. 19

  21. Costs, P MC P = $10 MR ATC profit $6 Q 50 A C T I V E L E A R N I N G 2Answers 0 A competitive firm Profit per unit = P – ATC= $10 – 6 = $4 Total profit = (P – ATC) x Q = $4 x 50= $200 20

  22. Costs, P MC ATC $5 P = $3 MR Q 30 A C T I V E L E A R N I N G 3Identifying a firm’s loss 0 A competitive firm Determine this firm’s total loss, assuming AVC < $3. Identify the area on the graph that represents the firm’s loss. 21

  23. Costs, P MC ATC $5 loss P = $3 MR Q 30 A C T I V E L E A R N I N G 3Answers 0 A competitive firm Total loss = (ATC – P) x Q = $2 x 30= $60 loss per unit = $2 22

  24. Market Supply: Assumptions 1)All existing firms and potential entrants have identical costs. 존재하는 모든 기업들과 잠재적 진입자들의 비용조건은 동일하다. 2)Each firm’s costs do not change as other firms enter or exit the market. 각 기업의 비용은 다른 기업들이 시장에 진입하거나 퇴출하더라도 변화하지 않는다. 3)The number of firms in the market is 시장에서 기업의 수는 fixed in the short run 단기에서 고정(due to fixed costs) (고정비용 때문에) variable in the long run 장기에서는 변화(due to free entry and exit) (자유로운 진입과 퇴출때문에) 0 FIRMS IN COMPETITIVE MARKETS

  25. The SR Market Supply Curve As long as P ≥ AVC, each firm will produce its profit-maximizing quantity, where MR = MC. P ≥ AVC인 한 각 기업은 자신의 이윤이 극대화되는 산출량, 즉 MR = MC인 산출량에서 생산. Recall from Chapter 4: At each price, the market quantity supplied is the sum of quantities supplied by all firms. 각 가격에서 시장 공급량은 모든 기업이 공급하는 양의 합계 0 FIRMS IN COMPETITIVE MARKETS

  26. The SR Market Supply Curve S One firm Market P3 P3 P P MC P2 P1 P1 P2 AVC 30 10 20 Q Q 10,000 30,000 20,000 (market) (firm) 0 Example: 1000 identical firms At each P, market Qs = 1000 x (one firm’s Qs) FIRMS IN COMPETITIVE MARKETS

  27. Entry & Exit in the Long Run In the LR, the number of firms can change due to entry & exit. 장기에 기업의 수는 진입과 퇴출 때문에 변화 If existing firms earn positive economic profit, 만약 기존 기업이 모두 양의 경제적 이윤을 얻고 있다면 new firms enter, SR market supply shifts right. 새 기업들이 진입하여 단기 시장공급곡선이 오른쪽으로 이동 P falls, reducing profits and slowing entry. 가격이 하락, 이윤이 줄고 진입이 둔화될 것 If existing firms incur losses, 만약 기존 기업들이 손실을 보고 있다면 some firms exit, SR market supply shifts left. 일부 기업이 퇴출, 단기 시장공급곡선이 왼쪽으로 이동 P rises, reducing remaining firms’ losses. 가격이 올라 남아있는 기업들의 손실이 줄어들 것이다. 0 FIRMS IN COMPETITIVE MARKETS

  28. The Zero-Profit Condition 무이윤 조건 Long-run equilibrium: 장기균형The process of entry or exit is complete – remaining firms earn zero economic profit. 진입과 퇴출과정은 남아있는 기업들의 경제적 이윤이 0일 때 멈출 것이다. Zero economic profit occurs when P = ATC. 0의 경제적 이윤은 P=ATC일 때 발생 Since firms produce where P = MR = MC, the zero-profit condition is P = MC = ATC. 기업들은 P = MR = MC에서생산하므로 무이윤조건은 P = MC = ATC. Recall that MC intersects ATC at minimum ATC. 한계비용은 평균비용의 최저점에서 평균비용곡선과 만나므로 Hence, in the long run, P = minimum ATC. 0 FIRMS IN COMPETITIVE MARKETS

  29. Why Do Firms Stay in Business if Profit = 0?왜 기업들은 이윤이 0인 상황에서 사업을 지속하는가? Recall, economic profit is revenue minus all costs – including implicit costs, like the opportunity cost of the owner’s time and money. 경제적 이윤은 수입에서 기업주의 시간과 돈의 기회비용과 같은 암묵적 비용을 포함한 모든 비용을 뺀 것이라는 점을 기억하라. In the zero-profit equilibrium, 무이윤 균형에서 firms earn enough revenue to cover these costs 기업들은 이러한 비용들을 커버할 충분한 수입을 얻고 있으며 accounting profit is positive 이때의 회계적 이윤은 양의 값이다. 0 FIRMS IN COMPETITIVE MARKETS

  30. The LR Market Supply Curve One firm Market P P LRATC MC long-run supply P = min. ATC Q Q (market) (firm) 0 The LR market supply curve is horizontal at P = minimum ATC. In the long run, the typical firm earns zero profit. FIRMS IN COMPETITIVE MARKETS

  31. SR & LR Effects of an Increase in Demand Market P P S1 MC S2 ATC Profit P2 P2 long-run supply P1 P1 D2 D1 Q Q Q1 Q2 Q3 (market) (firm) 0 …but then an increase in demand raises P,… A firm begins in long-run eq’m… …driving profits to zero and restoring long-run eq’m. …leading to SR profits for the firm. Over time, profits induce entry, shifting S to the right, reducing P… One firm B A C FIRMS IN COMPETITIVE MARKETS

  32. Why the LR Supply Curve Might Slope Upward 왜 장기 공급 곡선이 우상향할 수 있는가? The LR market supply curve is horizontal if 장기공급곡선은 다음과 같은 경우라면 수평선이다. 1)all firms have identical costs, and 모든 기업의 비용이 동일하고 2)costs do not change as other firms enter or exit the market. 다른 기업이 시장에 진입하거나 퇴출하더라도 비용은 변화하지 않는다. If either of these assumptions is not true, then LR supply curve slopes upward. 만약 이러한 가정들이 사실이 아니라면 장기공급곡선은 우상향할 수 있다. 0 FIRMS IN COMPETITIVE MARKETS

  33. 1) Firms Have Different Costs 기업들의 비용조건이 다른 경우 As P rises, firms with lower costs enter the market before those with higher costs. 가격이 상승함에 따라 비용이 낮은 기업부터 높은 기업 순으로 진입 Further increases in P make it worthwhile for higher-cost firms to enter the market, which increases market quantity supplied. 가격이계속 상승하면 비용이 더 높은 기업들도 시장에 들어오게 되고 이는 시장의 공급량을 증대시킨다. Hence, LR market supply curve slopes upward. 따라서 장기 시장공급곡선은 우상향하게 된다. At any P, 어떤 가격에서건 For the marginal firm, 한계기업에게는P = minimum ATC and profit = 0.가격은 평균비용의 최저와 같고 이윤은 0 For lower-cost firms, profit > 0. 저비용 기업의 이윤은 0보다 크다. 0

  34. 2) Costs Rise as Firms Enter the Market기업들이 시장에 진입함에 따라 비용이 상승하는 경우 In some industries, the supply of a key input is limited (e.g., amount of land suitable for farming is fixed). 일부 산업에서는 핵심 투입요소의 공급이 제한되어 있다(예컨대 농사짓기에 적합한 땅의 양은 고정되어 있다). The entry of new firms increases demand for this input, causing its price to rise. 새로운 기업의 진입은 이러한 투입요소에 대한 수요를 증대시켜 가격을 상승시킨다. This increases all firms’ costs. 이는 모든 기업의 비용을 증대시킨다. Hence, an increase in P is required to increase the market quantity supplied, so the supply curve is upward-sloping. 따라서 공급을 늘이기 위해서는 가격이 상승해야 하며, 공급곡선은 우상향 하게 된다. 0 FIRMS IN COMPETITIVE MARKETS

  35. CONCLUSION: The Efficiency of a Competitive Market Profit-maximization: MC = MR Perfect competition: P = MR So, in the competitive eq’m: P = MC Recall, MC is cost of producing the marginal unit. P is value to buyers of the marginal unit. So, the competitive eq’m is efficient, maximizes total surplus. In the next chapter, monopoly: pricing & production decisions, deadweight loss, regulation. 0 FIRMS IN COMPETITIVE MARKETS

  36. CHAPTER SUMMARY • For a firm in a perfectly competitive market, price = marginal revenue = average revenue. • If P > AVC, a firm maximizes profit by producing the quantity where MR = MC. If P < AVC, a firm will shut down in the short run. • If P < ATC, a firm will exit in the long run. • In the short run, entry is not possible, and an increase in demand increases firms’ profits. • With free entry and exit, profits = 0 in the long run, and P = minimum ATC. 35

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