Bài giảng MicroEconomics - Chapter 09 Pure Competition

PureCompetitionChapter 9Chapter ObjectivesThe four basic market modelsConditions for pure competitionProfit maximization for competitive firmsThe competitive firm supply curveIndustry entry and exitIndustry cost structureEconomic efficiency9-2Four Market ModelsPure competitionPure monopolyMonopolistic competitionOligopolyMarket Structure ContinuumPureCompetitionMonopolisticCompetitionOligopolyPureMonopolyImperfect Competition9-3Pure CompetitionVery large numbersStandardized product“Price takers”Free entry and exitPerfectly elastic demandAverage revenueMarginal revenuePrice 9-4Firm’sDemandSchedule(AverageRevenue)Firm’sRevenueDataPure CompetitionPrice and Revenue246810121312623935246557869171048$1179Quantity Demanded (Sold)D = MR = ARTRPQDTRMR$131131131131131131131131131131131012345678910$0131262393524655786917104811791310$131131131131131131131131131131]]]]]]]]]]9-5Short Run Profit MaximizationMarket price is givenThree questions:Should the product be produced?If so, in what amount?What economic profit (loss) will be realized?9-6Profit MaximizationTwo approachesTotal revenue and total cost approachProduce where TR-TC is greatestMarginal revenue and marginal cost approachProduce where MR=MC9-7Total Revenue Total Cost Approach(1)Total Product(Output) (Q)(2)Total FixedCost (TFC)(3)Total VariableCost (TVC)(4)Total Cost(TC)(5)Total Revenue(TR)(6)Profit (+)or Loss (-)Price = $131012345678910$100100100100100100100100100100100$090170240300370450540650780930$1001902703404004705506407508801030$0131262393524655786917104811791310$-100-59-8+53+124+185+236+277+298+299+280Now Let’s Graph The ResultsDo You See Profit Maximization?9-81023456789101112131410234567891011121314$180017001600150014001300120011001000900800700600500400300200100$500400300200100Total Revenue and Total CostTotal EconomicProfitQuantity Demanded (Sold)Quantity Demanded (Sold)Total Revenue, (TR)Break-Even Point(Normal Profit)Break-Even Point(Normal Profit)MaximumEconomicProfit$299Total EconomicProfit$299P=$131Total Cost,(TC)Total Revenue Total Cost Approach9-9Marginal Revenue Marginal Cost Approach(1)TotalProduct(Output)(2)AverageFixedCost(AFC)(3)AverageVariableCost(AVC)(4)AverageTotalCost(ATC)(6)MarginalRevenue(MR)(7)Profit (+)or Loss (-)012345678910$100.0050.0033.3325.0020.0016.6714.2912.5011.1110.00$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00$190.00135.00113.33100.0094.0091.6791.4393.7597.78103.00$131131131131131131131131131131$-100-59-8+53+124+185+236+277+298+299+280No Surprise - Now Let’s Graph ItDo You See Profit Maximization Now?(5)MarginalCost(MC)$908070607080901101301509-10Cost and Revenue$20015010050012345678910OutputEconomic ProfitMR = PMCMR = MCAVCATCP=$131A=$97.78Marginal Revenue Marginal Cost Approach9-11Short Run Profit MaximizationProduce where MR (=P) = MCSuffer loss, still produce?Yes if loss is less than fixed costCover variable costShut down if loss greater than fixed costProduce if P > min AVC9-12Lower the Price to $81 andObserve the Results!Cost and Revenue$20015010050012345678910OutputLossShort Run Loss Minimizing CaseMR = PMCAVCATCP=$81A=$91.67V = $759-13Lower the Price Further to $71 and Observe the Results!Cost and Revenue$20015010050012345678910OutputShort Run Shut Down CaseMR = PMCAVCATCP=$71Short-Run Shut Down PointP < Minimum AVC$71 < $74V = $749-14Short-Run Supply CurveContinuing the Same ExampleSupply Schedule of a Competitive FirmPriceQuantitySuppliedMaximum Profit (+)or Minimum Loss (-)$1511311119181716110987600$+480+299+138-3-64-100-100The schedule shows the quantity a firmwill produce at a variety of prices 9-15Short-Run Supply CurveFirms produce where MR=MCP10Cost and Revenues (Dollars)Quantity SuppliedMR1P2MR2P3MR3P4MR4P5MR5MCAVCATCQ2Q3Q4Q5This Price is Below AVCAnd Will Not Be Producedabcde9-16Short-Run Supply CurveP10Cost and Revenues (Dollars)Quantity SuppliedMR1P2MR2P3MR3P4MR4P5MR5MCAVCATCQ2Q3Q4Q5abcdeMC Above AVC Becomesthe Short-Run Supply CurveSExamine the MC for the Competitive FirmBreak-even(Normal Profit) Point Shut-Down Point (If P is Below)Firms produce where MR=MC9-17Firm and Industry SupplyChanges in firm supplyShifts in marginal costInput price or technologyThe industry (total) supply curveSum of individual supply Industry supply and demandDetermine market price9-18Single FirmIndustrypPpP00Firm and Industry SupplyEconomicProfitdATCAVCs = MC$111$111DS = ∑ MC’s88000Competitive firm must take the price that isEstablished by industry supply and demand9-19Long Run Profit MaximizationAssumptionsEntry and exit onlyIdentical costsConstant-cost industryGoal of the analysisIn the long run, P = min ATCEntry eliminates profitsExit eliminates losses9-20Single FirmIndustrypPpP0010090,00080,000100,000Entry Eliminates ProfitsATCMRMC$605040D1S1An increase in demand temporarily raises priceHigher prices draw in new competitorsIncreased supply returns price to equilibriumD2$605040S29-21Single FirmIndustrypPpP0010090,00080,000100,000Exit Eliminates LossesATCMRMC$605040D3S3A decrease in demand temporarily lowers priceLower prices drive away some competitorsDecreased supply returns price to equilibriumD1$605040S19-22Long Run SupplyConstant cost industryEntry/exit does not affect LR ATCConstant resource priceSpecial caseIncreasing cost industryMost industriesLR ATC increases with expansionSpecialized resourcesDecreasing cost industry9-23P0QLong-Run Supply CurveConstant-Cost Industry90,000100,000110,000Q3Q1Q2$50P1P2P3SZ1Z2Z3D3D1D29-24P0QLong-Run Supply CurveIncreasing-Cost Industry90,000100,000110,000Q3Q1Q2$50P1SY1Y2Y3D3D1D2$40$55P2P3How would a decreasing-cost industry look?9-25Pure Competition and EfficiencyProductive efficiency P = minimum ATCAllocative efficiency P = MCMaximum consumer and producer surplusDynamic adjustments“Invisible Hand” revisited 9-26Single FirmMarketPricePriceQuantityQuantity00Long-Run EquilibriumPMRDSQeQfATCProductive Efficiency: Price = minimum ATCAllocative Efficiency: Price = MCPure competition has both inits long-run equilibriumMCP=MC=MinimumATC (Normal Profit)P9-27The Case of Generic DrugsEfficiency gains from entryLower price and greater outputPurpose of drug patentEncourage R&DCost recoveryExpiration of patent on drugsGenerics enterProfits decrease, output increaseCombined CS and PS increase9-28PriceQuantityP1P2DSQ1Q2fadcbAs price decreases to f,Consumer surplus abc increases to adfProducer and consumer surplus is maximized as shown by the gray triangleInitial Patent PriceResult: Greater Quantity at Lower Pricesas Predicted by the Competitive ModelNew Producers Enter MarketThe Case of Generic Drugs9-29Key Termspure competitionpure monopolymonopolistic competitionoligopolyimperfect competitionprice takeraverage revenuetotal revenuemarginal revenuebreak-even pointMR=MC ruleshort-run supply curvelong-run supply curveconstant-cost industryincreasing-cost industrydecreasing-cost industryproductive efficiencyallocative efficiencyconsumer surplusproducer surplus9-30Next Chapter PreviewPureMonopoly9-31