ECON 160 Week 10

1. The Firm in Competition (Chapter 13) ECON 160Week 10

2. Demand Facing the Firm $P $P $P $P D1 D3 D4 D2 Q Q Q Q Increasing degrees of Competition   Increasing degrees of Market Power 

3. Alternative Market Structures The Most Competitive Case: The Price Taker Firm

4. Assumptions for a Price Taker • Large number of buyers & sellers • Homogeneous products • Low information costs to buyers & sellers • Low costs of entry and exit of firms

5. Market and Firm Demand $P $P Firm Market D S Pe Pe D S D Q/T Qe Q/T

6. Price Taker Firm MC $ P Price = Marginal Revenue Pe D= MR Profit Maximizing Rate of output Qe Q/T

7. Total Revenue = Pe x Qe $ P MC Pe D Total Revenue Qe Q/T

8. Total Cost = AC x Q $ P MC AC Pe D AC at Qe Total Cost Qe Q/T

9. Profit = TR - TC $ P MC AC Pe D Q Q/T

10. Profits occur if (P=MC) > AC $ P MC AC Pe D= MR Qe Q/T

11. Market Response to Profits $P D So S’ Pe P’ D So Qx/T Qe Q’

12. Price Taker Firm: Zero Profits $ P MC ATC D Pe’ D’= MR Qe Q/T

13. Price Taker Firm: Loss $ P ATC MC Loss Pe D= MR Qe Q/T

14. Market Response to Losses $P D S’ So P’ Po D S’ Qx/T Q’ Qo

15. Price Taker Firm: Zero Profits $ P MC ATC Pe’ D’= MR Po D Qe Q/T

16. Long-Run Industry Equilibrium $P $P Firm Market MC D S ATC Pe Pe D S D Q/T Qe Qe Q/T

17. Implications of Price-Taker Industry • Demand for the firm is horizontal at the market price • Efficiency: Price equals marginal cost of production • Competition drives price to equal Average cost • Economic profits only exist in the short-run.