Perfect Competition Continued…

1. Perfect Competition Continued…

2. Key Graph (Figure 9-6) • P1 – Company should not operate at all • P2 – Operate at Q2 to cover variable costs, fixed costs will be lost. Shut-Down Point • P3 – To minimize losses, operate at Q3. It is above AVC. • P4 – The Break Even Point. Q4 • P4+ Anything above P4 = higher profits.

3. Marginal Cost Curves and Supply • In Figure 9-7 (230) note the similarity between the MC curve and the S curve. • How much we supply (Q) is directly related to how much it costs to make the product (MC), and how much we are paid to produce it (P). • Many factors that cause supply to shift cause MC to shift.

4. Market Shifts • Since we utilize Marginal Revenue = Marginal Cost to find our profit maximizing point, drops in demand hurt profits. Note similarity between MR and D. • Businesses have to pay close attention to demand, otherwise they might be producing too much or too little, which hurts business. • Figure 9-7 (What would happen if D declines?)

5. Key Question 4 (243)

6. Long-Run Profit Maximization • In the long-run firms can adjust their plant capacities or enter or leave the industry. • After all long-run adjustments are made the Price = Minimum ATC. • Previously, in the short-run, they would still operate at Minimum AVC, why?

7. Why does P = Min. ATC? • Firms seek profits and avoid losses. If they do not make money, they leave the industry. • Firms leaving the industry reduces supply, which increases price for firms that remain. • If an industry is profitable, new firms join, this increases supply and reduces price back to Min. ATC... Or lower. Which starts the cycle again.

8. Long-Run Equilibrium • Long-Run Equilibrium in the Perfectly Competitive industry is created by businesses seeking higher profits or reduced losses. • Over-time, supply and demand oscillate back and forth around the equilibrium point. • Figures 9-8 and 9-9 (232-233)

9. Costs and the Slope of Supply • If costs are constant, firms entering or leaving the industry do not affect resource prices, supply is perfectly elastic. Fig 9-10 • Most industries have increasing costs, which means that firms entering the industry increase resource costs for the others. Fig 9-11 • Higher costs shift the ATC upwards. • Some industries have decreasing costs.

10. Pure Competition and Efficiency • Productive and Allocative Efficiency lead to the most efficient use of scarce resources. • Productive Efficiency: P = Minimum ATC • In the Long-Run firms must produce at the minimum ATC because new firms are coming and going. • Productive Efficiency MUST be achieved in perfect competition or you will not survive. • This is called the low-cost producer.

11. Allocative Efficiency and Perfect Competition. • The Price of any product is society’s measure of the relative worth of an additional unit. • The long-run price = the marginal benefit • The long-run price = the marginal cost (otherwise we would not sacrifice the resources) • Under allocation: P > MC • Over allocation: P < MC

12. The Commodities Exchange

13. The Commodities Exchange • The pre-eminent example of perfect competition in practice on a daily basis is the Chicago Board of Trade. • It facilitates the purchase and sale of a multitude of commoditized or standardized goods, such as wheat, barley, sugar, cotton et cetera. • http://www.cmegroup.com/company/cbot.html

14. Market Structure Summary Videos • It helps to watch these prior to completing the chapter assignment for Perfect Competition. • The Market Structures • Perfect Competition Summarized

15. Assignment # 12 • Questions 5, 7, and 8 on page 244.