Transcript Chapter 23 - Pure Competition

Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Unit 3
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9-1
Theory of the Firm
ECONOMIC COSTS
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9-2
•Explicit + Implicit costs
•Explicit costs
•Monetary payments to others
•Implicit costs
•Opportunity costs of owner
•Self-owned resources
•Self-employed resources
PROFITS
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9-3
• Accounting profit = Total
revenue – Explicit cost
• Economic profit = Total
Revenue – Economic cost
• Normal profit = Implicit
cost
SHORT RUN AND LONG RUN
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9-4
• The short run
–Fixed plant capacity
–Variable intensity of plant
use
–Variable output
• The long run
–Variable plant capacity
–Firms enter and exit
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
SHORT-RUN PRODUCTION
RELATIONSHIPS
Total Product (TP)
Marginal Product (MP)
Change in Total Product
Marginal Product =
Change in Labor Input
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Average Product (AP)
Average Product =
Total Product
Units of Labor
9-5
SHORT-RUN PRODUCTION COSTS
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Summary
Total Fixed Costs = TFC
Total Variable Costs = TVC
Total Costs = TC
Average Fixed Costs = AFC
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Average Variable Costs = AVC
Average Total Costs = ATC
Marginal Cost = MC
9-6
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Average product and
marginal product
PRODUCTIVITY AND COST CURVES
Short-Run
Competitive
Equilibrium
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9-7
Quantity of labor
Costs (dollars)
Long-Run Supply
AP
MP
MC
AVC
Quantity of output
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9-8
Law of Diminishing
Marginal Returns
As more of a variable
resource is added to a
fixed resource, at some
point, the MP of the
variable resource will
decline.
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Total Product
TP
Four Market
Models
SHORT-RUN PRODUCTION
RELATIONSHIPS
Law of Diminishing Returns
Short-Run
Competitive
Equilibrium
Long-Run Supply
Pure Competition
and Efficiency
9-9
AP and MP
Long-Run
Equilibrium for a
Competitive Firm
Quantity of Labor
Quantity of Labor
Negative
Marginal
Returns
Average
Product
Marginal
Product
SHORT-RUN COSTS GRAPHICALLY
Four Market
Models
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Costs (dollars)
Demand as seen
by a Purely
Competitive
Seller
MC
ATC
AVC
AFC
Quantity
9 - 10
LONG-RUN PRODUCTION COSTS
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Unit Costs
Four Market
Models
LRATC
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Output
9 - 11
Four Market
Models
ECONOMIES AND
DISECONOMIES OF SCALE
Demand as seen
by a Purely
Competitive
Seller
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Constant returns
to scale
LRATC
Pure Competition
and Efficiency
9 - 12
Diseconomies
of scale
Unit Costs
Short-Run Profit
Maximization
Economies
of scale
Output
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
FOUR MARKET MODELS
Perfect Competition:
• Very Large Numbers
• Standardized Product
• “Price Takers”
• Free Entry and Exit
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Perfect
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Pure Competition
and Efficiency
Efficient
9 - 13
Inefficient
SHORT-RUN PROFIT MAXIMIZATION
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 14
Two Approaches...
First:
Total Revenue – Total Cost Approach
Second:
Marginal Revenue = Marginal Cost
Approach
MR = MC Rule
Three Characteristics of MR=MC Rule:
• The rule applies only if producing is
preferred to shutting down
• Rule applies to all markets
(PC, M, MC, & O)
• Rule can be restated P=MC
MARGINAL REVENUE-MARGINAL COST APPROACH
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 15
Average Average Average
Price = Total
Total Fixed Variable Total Marginal Marginal Economic
Cost
Cost
Product Cost
Cost Revenue Profit/Loss
0
1
2
3
4
5
6
7
8
9
10
The
$100.00 $90.00 $190.00
same
profit
50.00 85.00
135.00
33.33 80.00 113.33
maximizing
25.00 75.00 100.00
20.00 74.00
94.00
result!
16.67 75.00
91.67
14.29
12.50
11.11
10.00
77.14
81.25
86.67
93.00
91.43
93.75
97.78
103.00
90
80
70
60
70
80
90
110
130
150
$ 131
131
131
131
131
131
131
131
131
131
- $100
- 59
-8
+ 53
+ 124
+ 185
+ 236
+ 277
+ 298
+ 299
+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
$200
Cost and Revenue
Four Market
Models
Profit Maximization Position
Economic Profit
150
$131.00
MRDARP
ATC
AVC
100
$97.78
50
Pure Competition
and Efficiency
0
9 - 16
MC
1 2 3 4 5 6 7 8 9 10
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Cost and Revenue, (dollars)
Four Market
Models
Break-even
(Normal Profit)
Point
MR5
P5
ATC
MR4
P4
AVC
P3
P2
P1
MR3
MR2
MR1
Do not
Produce –
Below AVC
Q2 Q3 Q4
9 - 17
MC
Q5
Quantity Supplied
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Cost and Revenue, (dollars)
Four Market
Models
Yields the
Short-Run
Supply Curve
MC
P5
MR5
P4
MR4
P3
MR3
MR2
MR1
P2
P1
MC
Above AVC
Q2 Q3 Q4
9 - 18
Supply
Q5
Quantity Supplied
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 19
Cost and Revenue, (dollars)
Four Market
Models
Lower Costs Move
the Supply Curve
to the Right
MC1
S1
MC2
S2
AVC1
AVC2
Quantity Supplied
TAXES & SUBSIDIES
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 20
Per Unit Tax
• AVC
• AFC
No ∆
• ATC
• MC
Per Unit Subsidy
• AVC
No ∆
• AFC
• ATC
• MC
Lump Sum Tax
No ∆
• AVC
• AFC
• ATC
No ∆
• MC
Lump Sum Subsidy
No ∆
• AVC
• AFC
• ATC
• MC
No ∆
SHORT-RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” its
Price from the Industry Equilibrium
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
P
S= MCs
P
Economic
ATC Profit S=MC
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
$111
MRDARP
$111
Long-Run Supply
AVC
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
D
8000
Industry
9 - 21
Q
8
Firm
Q
PROFIT MAXIMIZATION IN THE LONG RUN
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Temporary profits and the reestablishment
of long-run equilibrium
P
P
MC
LRATC
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
S1
$60
50
40
MR
Long-Run Supply
$60
50
40
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
D1
100
Firm
(price taker)
9 - 22
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
An increase in demand increases profits…
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
P
S1
P
MC
LRATC
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Economic
Profits
$60
50
40
MR
Long-Run Supply
$60
50
40
D2
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
D1
100
Firm
(price taker)
9 - 23
Q
100,000
Industry
Q
PROFIT MAXIMIZATION IN THE LONG RUN
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
New competitors increase supply, and lower
prices decrease economic profits.
Zero Economic
P
Profits
MC
LRATC
$60
50
40
MR
Long-Run Supply
S1
P
S2
$60
50
40
D2
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
D1
100
Firm
(price taker)
9 - 24
Q
100,000
Industry
Q
PURE COMPETITION AND EFFICIENCY
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
P
LRATC
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
P
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 25
Q
Underallocation
P > MC
MC
Overallocation
P < MC
Productive
MR
Efficiency
P = Min ATC
Allocative
Q
Efficiency
P = MC
MONOPOLY EXAMPLES
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 26
• Pure Monopoly
• Near Monopoly
• Natural Monopoly
• Regulated Monopoly
THE NATURAL MONOPOLY CASE
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Average Total Cost
Four Market
Models
$20
15
10
If LRATC declines over extended
output, least-cost production is
realized only if there is one
producer - a natural monopoly.
Pure Competition
and Efficiency
0
9 - 27
LRATC
50
100
Quantity
200
MONOPOLY REVENUES & COSTS
Revenue Data
Four Market
Models
Quantity Price
of
(Average Total
Marginal
Demand as seen
Output Revenue) Revenue Revenue
by a Purely
Cost Data
Average
Total
Cost
Profit +
Total Marginalor
Cost Cost loss -
Can 0you
$172see
$ 0profit
$100 90 - $100
] $162
]= MC
MR
>
Short-Run Profit
1
162 162
- 28
$190.00 190 80
Maximizationmaximization?
] 142
]
Competitive
Seller
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 28
2
3
4
5
6
7
8
9
10
152
142
132
122
112
102
92
82
72
304
] 122
426
] 102
528
] 82
610
] 62
672
] 42
714 ]
22
736 ]
2
738 ]
- 18
720
135.00 270
]
113.33 340
]
100.00 400
]
94.00 470
]
91.67 550
]
91.43 640 ]
93.73 750 ]
97.78 880 ]
103.00 1030
70 + 34
60 + 86
70 + 128
80 + 140
90 + 122
110 + 74
- 14
130
150 - 142
- 310
MONOPOLY REVENUES & COSTS
Elastic
$200
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 29
Dollars
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Inelastic
150
100
50
MR
0 1 2 3 4 5 6 7 8 9 10 11
DARP
Q
12 13 14 15 16 17 18
• MR bisects DARP
• When MR = 0 Total Revenue is
Maximized
• When MR is positive D is elastic
• When MR is negative D is inelastic
OUTPUT AND PRICE DETERMINATION
Profit Maximization Under Monopoly
Four Market
Models
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
Profit
Per Unit
175
Price, costs, and revenue
Demand as seen
by a Purely
Competitive
Seller
200
150
$122
125
$94
100
Profit
ATC
DARP
75
50
MR = MC
25
0
9 - 30
MC
1
2
3
4
MR
5
6
7
8
9
10
Q
INEFFICIENCY OF PURE MONOPOLY
P An industry in pure competition S = MC
sells where supply and
Four Market
Models
demand are equal
Demand as seen
by a Purely
Competitive
Seller
Long-Run Supply
At MR=MC
a monopolist
will sell less
units at a
higher price
than in
competition
Long-Run
Equilibrium for a
Competitive Firm
DARP
Short-Run Profit
Maximization
Pm
Short-Run
Competitive
Equilibrium
Pc
Pure Competition
and Efficiency
9 - 31
MR
Qm
Qc
Q
PRICE DISCRIMINATION
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
P
Economic profits with
price discrimination
Price and Costs
Four Market
Models
ATC
MR=D
DARP
Pure Competition
and Efficiency
9 - 32
MC
Q1
Q2
Q
REGULATED MONOPOLY
P
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
MR = MC
Fair-Return Price
Price and Costs
Four Market
Models
Pm
Socially-Optimum
Price
ATC
MC
Pf
Pr
DARP
Pure Competition
and Efficiency
MR
Qm
9 - 33
Qf
Qr
Q
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
Four Market
Models
Expect New Competitors
Demand as seen
by a Purely
Competitive
Seller
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
ATC
Price and Costs
Short-Run Profit
Maximization
P1
A1
Short-Run
Economic
Profits
D
Pure Competition
and Efficiency
9 - 34
MC
MR
Q1
Quantity
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
Four Market
Models
Expect New Competitors
Demand as seen
by a Purely
Competitive
Seller
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
ATC
Price and Costs
Short-Run Profit
Maximization
New competition provides
P1 other goods in the market
so
demand for your good falls.
A
1
Short-Run
Economic
Profits
D
Pure Competition
and Efficiency
9 - 35
MC
MR
Q1
Quantity
PRICE AND OUTPUT IN
MONOPOLISTIC COMPETITION
Four Market
Models
Long-Run Equilibrium
Normal
Profit
Only
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
P3
= A3
D
Pure Competition
and Efficiency
9 - 36
ATC
Price and Costs
Demand as seen
by a Purely
Competitive
Seller
MC
MR
Q3
Quantity
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
MONOPOLISTIC COMPETITION
AND EFFICIENCY
• Not Productively Efficient
P  Minimum ATC
• Not Allocatively Efficient
P  MC
• Excess Capacity
Graphically…
9 - 37
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
FOUR MARKET MODELS
Oligopoly:
• Control Over Price
•Mutual Interdependence
•Strategic Behavior
• Entry Barriers
• Economies of Scale
• Control of Resources
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 38
Pure
Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
Market Structure Continuum
OLIGOPOLY AND EFFICIENCY
Four Market
Models
Demand as seen
by a Purely
Competitive
Seller
Short-Run Profit
Maximization
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 39
• Not Productively Efficient
P  Minimum ATC
• Not Allocatively Efficient
P  MC
OLIGOPOLY BEHAVIOR
Four Market
Models
A Game-Theory Overview
RareAir’s Price Strategy
Demand as seen
by a Purely
Competitive
Seller
Short-Run
Competitive
Equilibrium
Long-Run Supply
Long-Run
Equilibrium for a
Competitive Firm
Pure Competition
and Efficiency
9 - 40
Uptown’s Price Strategy
Short-Run Profit
Maximization
High
A
$12
Low
B
$15
High
$12
C
$6
$6
D
Low
$15
$8
$8