Bài giảng Managerial Economics - Chapter 11 Managerial Decisions in Competitive Markets

Chapter 11Managerial Decisions in Competitive MarketsPerfect CompetitionFirms are price-takersEach produces only a very small portion of total market or industry outputAll firms produce a homogeneous productEntry into & exit from the market is unrestricted2Demand for a Competitive Price-TakerDemand curve is horizontal at price determined by intersection of market demand & supplyPerfectly elasticMarginal revenue equals priceDemand curve is also marginal revenue curve (D = MR)Can sell all they want at the market priceEach additional unit of sales adds to total revenue an amount equal to price3DSQuantityPrice (dollars)QuantityPrice (dollars)P0Q0Panel A – MarketPanel B – Demand curve facing a price-takerDemand for a Competitive Price-Taking Firm (Figure 11.2)00P0D = MR4Profit-Maximization in the Short RunIn the short run, managers must make two decisions:Produce or shut down?If shut down, produce no output and hires no variable inputsIf shut down, firm loses amount equal to TFCIf produce, what is the optimal output level?If firm does produce, then how much?Produce amount that maximizes economic profitProfit = 5Profit Margin (or Average Profit)Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin (& average profit)Managers should ignore profit margin (average profit) when making optimal decisions6Short-Run Output DecisionFirm’s manager will produce output where P = MC as long as:TR  TVCor, equivalently, P  AVCIf price is less than average variable cost (P  AVC), manager will shut downProduce zero outputLose only total fixed costsShutdown price is minimum AVC7Total revenue =$36 x 600 = $21,600Profit = $21,600 - $11,400 = $10,200 Total cost = $19 x 600 = $11,400Profit Maximization: P = $36 (Figure 11.3)8Profit Maximization: P = $36 (Figure 11.4)Panel A: Total revenue & total costPanel B: Profit curve when P = $369Short-Run Loss Minimization: P = $10.50 (Figure 11.5)Total cost = $17 x 300 = $5,100Total revenue = $10.50 x 300 = $3,150Profit = $3,150 - $5,100 = -$1,95010Irrelevance of Fixed CostsFixed costs are irrelevant in the production decisionLevel of fixed cost has no effect on marginal cost or minimum average variable costThus no effect on optimal level of output11AVC tells whether to produceShut down if price falls below minimum AVCSMC tells how much to produceIf P  minimum AVC, produce output at which P = SMCATC tells how much profit/loss if produceSummary of Short-Run Output Decision•12Short-Run Supply CurvesFor an individual price-taking firmPortion of firms’ marginal cost curve above minimum AVCFor prices below minimum AVC, quantity supplied is zeroFor a competitive industryHorizontal sum of supply curves of all individual firms; always upward slopingSupply prices give marginal costs of production for every firm13Short-Run Producer SurplusShort-run producer surplus is the amount by which TR exceeds TVCThe area above the short-run supply curve that is below market price over the range of output suppliedExceeds economic profit by the amount of TFC14Computing Short-Run Producer Surplus (Figure 11.6)15Short-Run Firm & Industry Supply (Figure 11.6)16Long-Run Profit-Maximizing Equilibrium (Figure 11.7)Profit = ($17 - $12) x 240 = $1,20017Long-Run Competitive EquilibriumAll firms are in profit-maximizing equilibrium (P = LMC)Occurs because of entry/exit of firms in/out of industryMarket adjusts so P = LMC = LAC18Long-Run Competitive Equilibrium (Figure 11.8)19Long-Run Industry SupplyLong-run industry supply curve can be flat (perfectly elastic) or upward slopingDepends on whether constant cost industry or increasing cost industryEconomic profit is zero for all points on the long-run industry supply curve for both types of industries20Long-Run Industry SupplyConstant cost industryAs industry output expands, input prices remain constant, & minimum LAC is unchangedP = minimum LAC, so curve is horizontal (perfectly elastic)Increasing cost industryAs industry output expands, input prices rise, & minimum LAC risesLong-run supply price rises & curve is upward sloping21Long-Run Industry Supply for a Constant Cost Industry (Figure 11.9)22Long-Run Industry Supply for an Increasing Cost Industry (Figure 11.10)Firm’s output23Economic RentPayment to the owner of a scarce, superior resource in excess of the resource’s opportunity costIn long-run competitive equilibrium firms that employ such resources earn zero economic profitPotential economic profit is paid to the resource as economic rentIn increasing cost industries, all long-run producer surplus is paid to resource suppliers as economic rent24Economic Rent in Long-Run Competitive Equilibrium (Figure 11.11)25Profit-Maximizing Input UsageProfit-maximizing level of input usage produces exactly that level of output that maximizes profit26Profit-Maximizing Input UsageMarginal revenue product (MRP)MRP of an additional unit of a variable input is the additional revenue from hiring one more unit of the inputIf choose to produce:If the MRP of an additional unit of input is greater than the price of input, that unit should be hiredEmploy amount of input where MRP = input price27Profit-Maximizing Input UsageAverage revenue product (ARP)Average revenue per workerShut down in short run if ARP < MRPWhen ARP < MRP, TR < TVC28Profit-Maximizing Labor Usage (Figure 11.12)29Implementing the Profit-Maximizing Output DecisionStep 1: Forecast product priceUse statistical techniques from Chapter 7Step 2: Estimate AVC & SMC••30Implementing the Profit-Maximizing Output DecisionStep 3: Check shutdown ruleIf P  AVCmin then produceIf P < AVCmin then shut downTo find AVCmin substitute Qmin into AVC equation31Implementing the Profit-Maximizing Output DecisionStep 4: If P  AVCmin, find output where P = SMCSet forecasted price equal to estimated marginal cost & solve for Q*32Implementing the Profit-Maximizing Output DecisionStep 5: Compute profit or lossProfit = TR - TCIf P < AVCmin, firm shuts down & profit is -TFC33Profit & Loss at Beau Apparel (Figure 11.13)34Profit & Loss at Beau Apparel (Figure 11.13)35