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PURE COMPETITION

PURE COMPETITION. Chapter 11. A Perfectly Competitive Market: Assumptions. Both buyers & sellers are “price takers” Number of firms is large No barriers to entry Firms’ products are identical Complete information Firms are profit maximizers. Supply Curves and Perfect Competition.

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PURE COMPETITION

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  1. PURECOMPETITION Chapter 11

  2. A Perfectly Competitive Market: Assumptions • Both buyers & sellers are “price takers” • Number of firms is large • No barriers to entry • Firms’ products are identical • Complete information • Firms are profit maximizers

  3. Supply Curves and Perfect Competition • Supply … • schedule of quantities of goods … • In PC market, a firm’s SC is its SRMC above AVC.

  4. Price $10 8 6 4 2 0 Quantity DCs and PC • Recall: Industry DC is  sloping. • In PC: Firm’s DC  Industry DC Market Firm Market supply Price Individual firm demand $10 A B C 8 6 4 Market Demand 2 0 10 20 30 Quantity 1,000 3,000 2,000

  5. Relationship between TR, AR & MR for PC firm •  for PC firm, MR = P • ie, P=AR=MR $7 $7 $7 $7 $7 $7 $7 $7 … … … …

  6. $385 350 Maximum profit =$81 315 280 245 Total cost, revenue 210 $130 175 140 105 70 Loss Profit 35 0 1 2 3 4 5 6 7 8 9 Quantity Profit Maximization: Max{TR–TC} MR = SlopeTR TC TR Loss MC = SlopeTC Tot. Profit =$45

  7. Quantity Produced Marginal Cost Costs Price = MR 60 $35.00 0 $28.00 35.00 1 50 20.00 35.00 2 16.00 35.00 3 40 C A 14.00 35.00 4 12.00 B 30 35.00 5 A 17.00 35.00 6 20 22.00 35.00 7 30.00 35.00 8 10 40.00 35.00 9 54.00 0 35.00 10 68.00 1 2 3 4 5 6 7 8 9 10 Quantity Marginal Cost, Marginal Revenue, and Price MC P = D = MR

  8. Finding Profit and Loss

  9. Graphing Profits: Max()  Positive  MC MC MC Price Price Price 65 65 65 60 60 60 55 55 55 ATC 50 50 50 ATC 45 45 45 40 40 40 D A P = MR Loss P = MR 35 35 35 P = MR Profit B 30 30 30 ATC AVC 25 25 25 AVC C AVC E 20 20 20 15 15 15 10 10 10 5 5 5 0 0 0 10 1 2 3 4 5 6 7 8 9 12 1 2 3 4 5 6 7 8 9 10 12 1 2 3 4 5 6 7 8 9 10 12 Quantity Quantity Quantity Profit case (>0) Loss case Zero profit case

  10. The Shutdown Decision • Once invested in Fixed (sunk) costs… • TFC > 0 …  TC … • If Produce: • TFC > 0; what about TVC? Are they >,<, or = 0? • On revenue side: TR > 0 • If Shut-down: • TC > 0, because … • Are TVC >,<, or = 0? • TR = 0 and • Shut-down rule… • Continue to operate in S/R, even if TC > TR, as long as? • TR ≥ TVC; implies what about averages? • P  AVC  operate if P ≥ AVC

  11. The Shutdown Decision 60 60 40 90

  12. Price 60 50 40 30 20 A $17.80 10 0 The Shutdown Decision MC ATC Loss P = MR AVC 4 Quantity 2 6 8

  13. Price Quantity Market Firm S MC Price D2 25  D1  20 AVC  17.80 D0 0 0 6 7 750 Quantity 5 550 650 No. of firms = 100

  14. Price 60 50 40 30 20 10 2 4 6 8 Quantity Long-Run Competitive Equilibrium MC SRATC LRATC P = MR 0

  15. Price $9 Quantity 840 Market Response to an Increase in Demand Market Firm Price MC S0SR S1SR AC B $9 B C Profit 7 7 SLR A A D1 D0 0 12 10 0 Quantity 700 1,200

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