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Competition

Learn about optimal decision-making in competitive markets, including how to maximize profit and minimize costs. Explore topics such as perfect competition, monopolistic competition, and oligopoly. Discover the short-run optimal output level and the factors that influence profitability and market price.

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Competition

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  1. Chapter 8 Competition

  2. Recall: Producer Decision-making • Optimal behavior: choose the right input combination or right production level • Goal: • Max production at given cost • Min cost for given output level • Max profit profit = TR – TC TR = P Q P: determined by market

  3. Oligopoly Monopolistic competition Imperfect Monopoly Market Structures • Perfect competition • Imperfect competition

  4. Goal: Maximize Profit •  = TR – TC Recall: • TC = TFC + TVC = wL + rK • ATC = TC / Q • MC = Δ(TC)/ΔQ

  5. Total Revenue: TR • TR = PQ • AR = PQ/Q = P • MR = Δ(PQ)/ΔQ = (ΔP*Q)/ΔQ + (P*ΔQ)/ΔQ = (ΔP /ΔQ ) Q + P(ΔQ/ΔQ )

  6. Profit-Maximizing Output • Decision rule:  is maximized when MR = MC profit is maximized at the quantity of output where the marginal revenue of the last unit produced is equal to its marginal cost.

  7. under perfect competition ΔP=0 MR =P Decision rule:  is maximized when P=MC

  8. Perfect Competition • Perfectly competitive market: all participants are price takers • Perfectly competitive industry:all producers are price-takers • Price taker: whose action has no effect on market price • Price-taking producer: market price does not change because of the quantity he sells. • Price-taking consumer: market price does not change because of the amount he buys.

  9. Perfect Competition: Characteristics • Many buyers and sellers and each is so small that no one can affect price individually (for sellers, no one has large market share) • All firms produce a homogeneous product (identical / standardized) at least consumers think so • Free entry and exit each firm has complete knowledge about production and cost

  10. Short-Run optimal output level • Goal: maximize profit • Demand facing the industry: downward sloping • Demand facing the firm: horizontal (all are price takers, and no one is large enough to affect market price) • Optimal output level determined by D=P=MC

  11. Short-Run optimal output level: various profit situations • Rule: produce at P=MC. • Positive Economic Profit: when D=MR=P>ATC at P=MC • Operating at a loss: when AVC<D=MR=P<ATC at P=MC • Shut Down: when D=MR=P<AVC at P=MC • The break-even price: the market price at which the firm earns zero profits (P=ATC).

  12. Costs and Production in the Short-Run

  13. Principles: • MC tells how much to produce (produce up to the amount where P=MC) • ATC tells how much profit or loss is made if the firm decides to produce (profit = (P - ATC) * Q). • AVC tells whether to keep producing (keep producing only when P>AVC at P=MC)

  14. Summary (P. 220, Table 9-4)

  15. Profitability and Market Price

  16. Profitability and Market Price

  17. The Short-Run Production Decision A firm will cease production in the short-run if the market price falls below the shut-down price, which is equal to minimum average variable cost.

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