Pure Competition

1. Pure Competition 7

2. Four Market Models Pure competition Pure monopoly Monopolistic competition Oligopoly LO1

3. Pure Competition: Characteristics Very large numbers of sellers Standardized product “Price takers” Easy entry and exit Perfectly elastic demand Firm produces as much or little as they want at the price Demand graphs as horizontal line LO2

4. Average, Total, and Marginal Revenue Firm’s Demand Schedule (Average Revenue) Firm’s Revenue Data ] ] ] ] ] ] ] ] ] ] TR P QD TR MR 0 1 2 3 4 5 6 7 8 9 10 $131 131 131 131 131 131 131 131 131 131 131 $0 131 262 393 524 655 786 917 1048 1179 1310 $131 131 131 131 131 131 131 131 131 131 D = MR = AR LO3

5. Average, Total, and Marginal Revenue Average revenue Revenue per unit AR = TR/Q = P Total revenue TR = P × Q Marginal revenue Extra revenue from 1 more unit MR = ΔTR/ΔQ LO3

6. Profit Maximization: TR-TC Approach Three questions: Should the firm produce? If so, what amount? What economic profit (loss) will be realized? LO3

7. Profit Maximization: MR-MC Approach LO3

8. Profit Maximization: MR-MC Approach $200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 MR = MC MC P=$131 Economic Profit MR = P ATC Cost and Revenue AVC A=$97.78 Output LO3

9. Loss-Minimizing Case Loss minimization Still produce because P > min AVC Losses at a minimum where MR = MC LO3

10. Profit Minimization: MR-MC Approach LO3

11. Loss-Minimizing Case $200 150 Cost and Revenue 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MC Loss ATC A=$91.67 AVC P=$81 MR = P V = $75 LO3

12. Shutdown Case: MR-MC Approach LO3

13. Shutdown Case $200 150 Cost and Revenue 100 50 0 1 2 3 4 5 6 7 8 9 10 Output MC ATC V = $74 AVC MR = P P=$71 Short-Run Shutdown Point P < Minimum AVC $71 < $74 LO3

14. Marginal Cost and Short-Run Supply LO4

15. Marginal Cost and Short-Run Supply Cost and Revenues (Dollars) Quantity Supplied S MC e MR5 P5 d ATC MR4 P4 c AVC MR3 P3 b P2 MR2 a P1 MR1 Shut-Down Point (If P is Below) Q2 Q3 Q4 Q5 0 LO4

16. 3 Production Questions LO4

17. Firm and Industry: Equilibrium LO4

18. Firm and Industry: Equilibrium S = ∑ MCs s = MC Economic profit ATC d $111 $111 AVC D 8000 8 (a) Single Firm (a) Industry LO4

19. Profit Maximization in the Long Run Easy entry and exit The only long-run adjustment we consider Identical costs All firms in the industry have identical costs Constant-cost industry Entry and exit do not affect resource prices LO5

20. Long-Run Equilibrium Entry eliminates profits Firms enter Supply increases Price falls Exit eliminates losses Firms exit Supply decreases Price rises LO5

21. Entry Eliminates Economic Profits P P 0 0 q 80,000 90,000 100,000 100 Q (a) Single firm (b) Industry S1 MC $60 50 40 $60 50 40 ATC S2 MR D2 D1 LO5

22. Exit Eliminates Losses P P 0 0 q 80,000 90,000 100,000 100 Q (a) Single Firm (b) Industry S3 MC $60 50 40 $60 50 40 ATC S1 MR D1 D3 LO5

23. Long-Run Supply Constant-cost industry Entry/exit does not affect LR ATC Constant resource price Special case Increasing-cost industry Most industries LR ATC increases with expansion Specialized resources Decreasing-cost industry LO6

24. LR Supply: Constant-Cost Industry P P1 P2 P3 0 Q $50 S Z3 Z1 Z2 D1 D2 D3 Q2 Q1 Q3 100,000 110,000 90,000 LO6

25. LR Supply: Increasing-Cost Industry P 0 Q S P2 $55 Y2 P1 $50 Y1 P3 $40 Y3 D2 D1 D3 Q3 Q2 Q1 100,000 110,000 90,000 LO6

26. Pure Competition and Efficiency In the long run, efficiency is achieved Productive efficiency Producing where P = min ATC Allocative efficiency Producing where P = MC LO6

27. Dynamic Adjustments Purely competitive markets will automatically adjust to Changes in consumer tastes Resource supplies Technology Recall the “invisible hand” LO6