1、,Firms in Competitive Markets,Chapter 14,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to:Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,The Meaning of Compe
2、tition,A perfectly competitive market has the following characteristics:There are many buyers and sellers in the market.The goods offered by the various sellers are largely the same.Firms can freely enter or exit the market.,The Meaning of Competition,As a result of its characteristics, the perfectl
3、y competitive market has the following outcomes:The actions of any single buyer or seller in the market have a negligible impact on the market price.Each buyer and seller takes the market price as given.,The Meaning of Competition,Buyers and sellers in competitive markets are said to be price takers
4、.Buyers and sellers must accept the price determined by the market.,Revenue of a Competitive Firm,Total revenue for a firm is the selling price times the quantity sold.TR = (P X Q),Revenue of a Competitive Firm,Total revenue is proportional to the amount of output.,Revenue of a Competitive Firm,Aver
5、age revenue tells us how much revenue a firm receives for the typical unit sold.,Revenue of a Competitive Firm,In perfect competition, average revenue equals the price of the good.,Revenue of a Competitive Firm,Marginal revenue is the change in total revenue from an additional unit sold.MR =TR/ Q,Re
6、venue of a Competitive Firm,For competitive firms, marginal revenue equals the price of the good.,Total, Average, and Marginal Revenue for a Competitive Firm,Profit Maximization for the Competitive Firm,The goal of a competitive firm is to maximize profit.This means that the firm will want to produc
7、e the quantity that maximizes the difference between total revenue and total cost.,Profit Maximization: A Numerical Example,Profit Maximization for the Competitive Firm.,Quantity,0,ATC,AVC,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Profit Maximization for the Competitive
8、 Firm,Profit maximization occurs at the quantity where marginal revenue equals marginal cost.,Profit Maximization for the Competitive Firm,When MR MC increase Q,When MR MC decrease Q,When MR = MC Profit is maximized.,The Marginal-Cost Curve and the Firms Supply Decision.,Quantity,0,MC,ATC,AVC,Copyri
9、ght 2001 by Harcourt, Inc. All rights reserved,The Firms Short-Run Decision to Shut Down,A shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions.Exit refers to a long-run decision to leave the market.,The Firms Short-Run
10、 Decision to Shut Down,The firm considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down.Sunk costs are costs that have already been committed and cannot be recovered.,The Firms Short-Run Decision to Shut Down,The firm shuts down if the revenue it gets from
11、 producing is less than the variable cost of production.Shut down if TR VCShut down if TR/Q VC/QShut down if P AVC,The Firms Short-Run Decision to Shut Down.,Quantity,ATC,AVC,0,Costs,The Firms Short-Run Decision to Shut Down,The portion of the marginal-cost curve that lies above average variable cos
12、t is the competitive firms short-run supply curve.,The Firms Long-Run Decision to Exit or Enter a Market,In the long-run, the firm exits if the revenue it would get from producing is less than its total cost.Exit if TR TCExit if TR/Q TC/QExit if P TCEnter if TR/Q TC/QEnter if P ATC,The Competitive F
13、irms Long-Run Supply Curve.,Quantity,MC = Long-run S,ATC,AVC,0,Costs,The Competitive Firms Long-Run Supply Curve,The competitive firms long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.,The Competitive Firms Long-Run Supply Curve.,Quantity,MC,ATC,AVC,
14、0,Costs,The Firms Short-Run and Long-Run Supply Curves,Short-Run Supply CurveThe portion of its marginal cost curve that lies above average variable cost.Long-Run Supply CurveThe marginal cost curve above the minimum point of its average total cost curve.,Measuring Profit in the Graph for the Compet
15、itive Firm.,Quantity,0,Price,P = AR = MR,ATC,MC,P,Profit-maximizing quantity,a. A Firm with Profits,Measuring Profit in the Graph for the Competitive Firm.,Quantity,0,Price,P = AR = MR,ATC,MC,P,Q,Loss-minimizing quantity,b. A Firm with Losses,Supply in a Competitive Market,Market supply equals the s
16、um of the quantities supplied by the individual firms in the market.,The Short Run: Market Supply with a Fixed Number of Firms,For any given price, each firm supplies a quantity of output so that its marginal cost equals price. The market supply curve reflects the individual firms marginal cost curv
17、es.,The Short Run: Market Supply with a Fixed Number of Firms.,(a) Individual Firm Supply,Quantity(firm),0,Price,(b) Market Supply,Quantity(market),Price,0,Supply,MC,1.00,$2.00,100,200,1.00,$2.00,100,000,200,000,The Long Run: Market Supply with Entry and Exit,Firms will enter or exit the market unti
18、l profit is driven to zero.In the long run, price equals the minimum of average total cost.The long-run market supply curve is horizontal at this price.,The Long Run: Market Supply with Entry and Exit.,(a) Firms Zero-Profit Condition,Quantity(firm),0,Price,P =minimum ATC,(b) Market Supply,Quantity(m
19、arket),Price,0,Supply,MC,ATC,The Long Run: Market Supply with Entry and Exit,At the end of the process of entry and exit, firms that remain must be making zero economic profit.The process of entry & exit ends only when price and average total cost are driven to equality.Long-run equilibrium must hav
20、e firms operating at their efficient scale.,Firms Stay in Business with Zero Profit,Profit equals total revenue minus total cost.Total cost includes all the opportunity costs of the firm.In the zero-profit equilibrium, the firms revenue compensates the owners for the time and money they expend to ke
21、ep the business going.,Increase in Demand in the Short Run,An increase in demand raises price and quantity in the short run.Firms earn profits because price now exceeds average total cost.,Increase in Demand in the Short Run.,Market,Firm,Quantity(firm),0,Price,MC,ATC,P1,Quantity(market),Price,0,D1,P
22、1,Q1,A,S,1,Long-runsupply,(a) Initial Condition,P,Increase in Demand in the Short Run.,Market,Firm,Quantity(firm),0,Price,MC,ATC,P1,Quantity(market),Price,0,D1,P1,Q1,A,S1,Long-runsupply,(b) Short-Run Response,Increase in Demand in the Short Run.,Market,Firm,Quantity(firm),0,Price,MC,ATC,P1,Quantity(
23、market),Price,0,D1,P1,Q1,A,S1,Long-runsupply,(c) Long-Run Response,D2,B,Q2,P2,S2,C,Q3,Why the Long-Run Supply Curve Might Slope Upward,Some resources used in production may be available only in limited quantities.Firms may have different costs.,Marginal Firm,The marginal firm is the firm that would
24、exit the market if the price were any lower.,Summary,Because a competitive firm is a price taker, its revenue is proportional to the amount of output it produces.The price of the good equals both the firms average revenue and its marginal revenue.,Summary,To maximize profit a firm chooses the quanti
25、ty of output such that marginal revenue equals marginal cost. This is also the quantity at which price equals marginal cost.Therefore, the firms marginal cost curve is its supply curve.,Summary,In the short run when a firm cannot recover its fixed costs, the firm will choose to shut down temporarily
26、 if the price of the good is less than average variable cost.In the long run when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.,Summary,In a market with free entry and exit, profits are driven to zero in the long run and all
27、firms produce at the efficient scale.Changes in demand have different effects over different time horizons.,Profit Maximization for the Competitive Firm.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Marginal-Cost Curve and the Firms Supply Decision.,Harcourt, Inc. item
28、s and derived items copyright 2001 by Harcourt, Inc.,The Firms Short-Run Decision to Shut Down.,The Competitive Firms Long-Run Supply Curve.,The Competitive Firms Long-Run Supply Curve.,Measuring Profit in the Graph for the Competitive Firm.,Measuring Profit in the Graph for the Competitive Firm.,The Short Run: Market Supply with a Fixed Number of Firms.,The Long Run: Market Supply with Entry and Exit.,Increase in Demand in the Short Run.,Increase in Demand in the Short Run.,Increase in Demand in the Short Run.,
