Chapter 10. Pure Competition in the Short Run

Chapter 10Pure Competition in the Short RunCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Four Market ModelsPure competitionPure monopolyMonopolistic competitionOligopolyPure CompetitionMonopolisticCompetitionOligopolyPureMonopolyMarket Structure ContinuumLO1Pure Competition: CharacteristicsVery large numbers of sellersStandardized product“Price takers”Easy entry and exitLO2Purely Competitive DemandPerfectly elastic demandFirm produces as much or little as they wish at the market priceDemand graphs as horizontal lineLO3Average, Total, and Marginal RevenueAverage revenueRevenue per unitAR = TR/Q = PTotal revenue TR = P X QMarginal revenue Extra revenue from 1 more unitMR = ΔTR/ΔQLO3Profit Maximization: TR – TC ApproachThe competitive producer will ask three questionsShould the firm produce?If so, in what amount?What economic profit (loss) will be realized?LO4Loss-Minimizing CaseLoss minimizationStill produce because MR > minimum AVCLosses at a minimum where MR = MCProducing adds more to revenue than to costsLO53 Production QuestionsLO3Output Determination in Pure Competition in the Short RunQuestionAnswerShould this firm produce?Yes, if price is equal to, or greater than, minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost.What quantity should this firm produce?Produce where MR (=P) = MC; there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized.Will production result in economic profit?Yes, if price exceeds average total cost (TR will exceed TC). No, if average total cost exceeds price (TC will exceed TR).LO6Firm and Industry: EquilibriumLO4Firm and Market Supply and Market Demand(1)QuantitySupplied, SingleFirm(2)TotalQuantitySupplied,1000 Firms(3)ProductPrice(4)TotalQuantityDemanded1010,000$151400099000131600088000111800077000919000660008111,000007113,000006116,000LO6Firm versus Industry: EquilibriumEconomicprofitdATCAVCs = MC$111$111DS = ∑ MC’s88000LO6Fixed Costs: Digging Out of a HoleShutting down in the short run does not mean shutting down foreverLow prices can be temporarySome firms switch production on and off depending on the market priceExamples: oil producers, resorts, and firms that shut down during a recession