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Ch 14

Ch 14. Firms in Perfectly Competitive Markets. 1. Which of the following is not a characteristic of a “Perfectly Competitive Market”?. Many buyers and sellers The goods are the same Buyers and sellers have a negligible impact on the market All participants are price makers

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Ch 14

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  1. Ch 14 Firms in Perfectly Competitive Markets

  2. 1. Which of the following is not a characteristic of a “Perfectly Competitive Market”? • Many buyers and sellers • The goods are the same • Buyers and sellers have a negligible impact on the market • All participants are price makers • Free entry and exit

  3. 2. What is the goal of a perfectly competitive firm?

  4. 3. Change in Total Revenue / Change in Q = ?

  5. 4. In a perfectly competitive firm, the Price is always equal to …… and ….

  6. 5. If a firm is producing where MC>MR, should they increase or decrease Q?

  7. 6. A perfectly competitive firm will always maximize profit where …….=…….

  8. 7. On a graph, a perfectly competitive firm will always maximize profit at an output level where ……..and ……….intersect

  9. 8. On the graph for a perfectly competitive firm, the horizontal line represents the price, the _______ and the ________ because the firm is a price taker.

  10. 9. Because the firm’s ___________ curve determines the Q of the good the firm is willing to supply at any price, it is the competitive firm’s supply curve.

  11. 10. At Q4, what is the relationship between MR and MC? Q2 Q5 Q1 Q3 Q4

  12. 11. A profit maximizing firm would choose to produce at which Q? Q2 Q5 Q1 Q3 Q4

  13. Check your answers • D • Maximize profits • Marginal Revenue • MR and AR • Decrease • MR = MC • MR and MC • AR and MR (or D) • Marginal Cost Curve • MR<MC • Q3

  14. Intro • When a gas station increases its prices , consumers may buy elsewhere • When a water co. increases its prices, consumers may decrease consumption, but have little or no choice on their supplier • ……..these firms have………… • Market power (price makers)

  15. Different market structures shape a firm’s pricing and production decisions Monopoly Oligopoly Perfectly Comp MonopCompet

  16. Goal: • Analyze competitive firms and S curves w/ relation to its costs of production

  17. Competitive (Perfectly) Market • Many buyers/sellers • Each has negligible impact • Price taker • Identical (same) goods • Free entry/exit • = access to info./technology

  18. Revenue of Competitive Firm • Goal : • Maximize profit • TR – TC • *can only change TR if change Q; can not change Price (TR = P x Q)

  19. Average Revenue – how much a firm receives for a “typical” unit sold (see table 14-1) TR/Q • For all firms: AR = P If TR = P x Q [ 10 = 5 x 2 ] And AR = TR / Q [5 x 2 / 2 ] …AR = 5 and P = 5 • AR = P : true for all firms

  20. Marginal Rev • Change in TR from sale of each additional unit of output • Change TR / Change in Q • TR = P x Q and P is fixed …so if Q increases by 1 unit, then TR increase by (P) dollars • 1 unit x $5 = TR = $5 • 2 units x $5 = TR = $10 • MR = Change TR / Change Q • MR = $5 / 1 = $5 • MR = $5 • MR = P • MR = P for competitive firm only (*b/c P is fixed)

  21. Quick Qz • When a competitive firm doubles the amount it sells, what happens to the P and its TR?

  22. Profit Maximization and the Competitive Firm’s Supply Curve • How much to supply? • What’s your goal? • Table 14-2 : Profit Max level of output? • Q ‘s 0-3 : what is MR MC relation? • MR > MC : • if increase Q = increase Profit • Q’s 6-8 : what is MR MC relation? • MR < MC: • If decrease Q = increase Profit • (*Q’s 6-8) why would you produce one more unit when it cost you more than the revenue you will receive) • Profit Max Q : MR = MC

  23. Fig 14-2 • The MC curve determines the Q the firm is willing to supply at any P……. • The MC curve is the Supply Curve for the firm • P = MR = AR = D …..back to fig 14-1 • Where S (MC) and D (P,MR,AR) meet is equilibrium and profit max.

  24. Draw a firm’s S and D (MC and MR) • Identify profit max output • Identify output where MR>MC; label it Q1 • Identify output where MR<MC; label it Q2 • Identify the Efficient Scale

  25. Firm’s “short-run” decision • “shut down” – temporary, short run decision to halt production • When? Why? • If can not cover variable costs of production • Shut down and lose all revenue…. • …will still pay fixed costs • ….but will save on variable costs • Ex: a restaurant decides to close for lunch • (its revenue was not covering variable costs of servers, cooks, etc…)

  26. Shut down if TR < VC • Or TR / Q < VC / Q [AR < AVC] • Since AR = P…… • …..shut down if P < AVC • “Short Run shut down decision = P < AVC” • Draw it

  27. Short Run Supply Curve • See figure 14-3 • Portion of the MC that is above AVC

  28. Fixed costs are “sunk” in short run • Airline example 1990’s • Losing money but continue to operate • Why? • Cant recover “sunk” costs of airplanes • As long as MR from each flight covers variable costs – continue to operate

  29. Quick Qz • You bought a ticket to the playoff game for $7. You told your friend you would be willing to pay $10. • When you arrive, you realize you lost your ticket. • Should you buy another ticket or just go home? • As long as MB > or = MC ; buy another ticket

  30. Exit decision : if P < ATC • Long Run decision – going out of business • Calculate Profit : (P-ATC) x Q • Graphing Profit and Loss

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