Econ 1900 Laura Lamb 1. 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Pure Monopoly 2.
Post on 24-Dec-2015
213 Views
Preview:
Transcript
Econ 1900 Laura Lamb
1
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Pure Monopoly
2
What are the major characteristics of each market model?
3
Large number of firms
Standardized products
Price takers
Easy entry & exit of firms
4
Then why do we study it?
◦ helps analyze industries with characteristics similar to perfect competition.
◦ provides a context in which to apply revenue and cost concepts developed in previous chapters.
◦ provides a norm or standard against which to compare and evaluate the efficiency of the real world.
5
Demand is perfectly elastic for each firm◦ Not for the industry◦ Individual firms can sell as much as they want at
the market price
6
Average Revenue
Total Revenue
Marginal Revenue
7
Product price Quantity Demanded
Total Revenue Marginal Revenue
8888888
0123456
8
1. Compare total revenue & total cost
2. Compare marginal revenue & marginal cost
9
Consider the Maple Syrup Market: The North American maple syrup market
produces nearly 30 million litres/year. More than 80% is produced in Canada. The number of firms can only be estimate because some are very small and sell their output in a small local market. There are about 9,500 producers in Canada & about 2,000 in the US.
Maple syrup is not quite a standardized good,
but is close. At the wholesale level, the market is highly competitive and a good example for perfect competition.
10
Total Revenue & Total Cost Schedule for Dave’s Maple Syrup
Quantity (cans/day)
Total Revenue ($/day)
Total cost ($/day)
Economic profit($/day)
01234567891011121314
081624324048566472808896
104112
15222730323334363944516076
104144
-15-14-11-607142025282928200
-3211
Where is the break-even point?
How do we describe the profit at this point?
12
MR = MC rule: in the short run, a firm will maximize profit by producing at the output level where MR = MC.
13
Quantity (cans/day)
Total Revenue$/day
MR$/day
Total Cost$/day
MC$/day
Economic Profit
8
9
10
11
12
64
72
80
88
96
8
8
8
8
39
44
51
60
76
5
7
9
16
25
28
29
28
20
14
***The MR=MC rule is applicable to all market models***
15
Note: for perfectly competitive firms: MR = MC is equivalent to P= MC
Why?
16
1. If average cost is $8/can, what is the economic profit?
2. Suppose the price dropped from $8/can to $6/can, how would the profit maximizing level of output change?
3. Now suppose, the price drops to $4/can. How much should Dave produce?
17
Quantity (cans/day)
Total revenue
($/day)
MR ($/day) Total cost
($/day)
MC ($/day) Economic profit
(TR-TC)
7
8
9
10
11
12
28
32
35
40
44
48
4
4
4
4
4
36
39
44
51
60
76
3
5
7
9
16
-8
-7
-8
-11
-16
-28
18
If a loss is incurred, the firm should continue to produce as long as the price is greater than average variable cost (AVC).
Modified rule: MR = MC if P>minimum AVC
19
In the example of Dave’s Maple Syrup: when P=$8, quantity supplied = 10 when P=$4, quantity supplied = 8
◦ appears rational in light of the law of supply!
◦ The short-run supply curve is the section of the MC curve starting at minimum AVC (and above).
20
In what situations would the supply curve for the firm shift?
21
Quantity supplied by 1 firm
Total quantity supplied by 1000 firms
Product price Total quantity demanded
10865
10,0008,0006,0005,000
8421
3,0005,0006,00010,000
22
Is the industry profitable at the equilibrium?
23
1. The firm should produce is P≥minimum AVC
2. The firm should produce the quantity at MR=MC
24
Individual firms must take price as given, but the supply plans of all competitive producers as a group are a major determinant of product price.
25
Assumptions:1.Entry and exit of firms are the only long‑run
adjustments 2.Firms in the industry have identical cost
curves.3.The industry is a constant‑cost industry
the entry and exit of firms will not affect resource prices or location of unit‑cost schedules for individual firms.
26
**In the long run, product price = minimum ATC
27
If P>minimum ATC →economic profits will attract new firms to the industry →increased supply of the product →price is driven down to minimum ATC.
If P<minimum ATC →economic losses will cause some firms to leave the industry →decreased supply of the product →price is driven up to minimum ATC.
28
A change in consumer tastes increases the demand for product
trace the steps to a new long-run equilibrium
Illustrate with two graphs, one for the firm and one for the industry.
29
Household income decreases causing a fall in demand for the product.
trace the steps to a new long-run equilibrium
Illustrate with two graphs, one for the firm and one for the industry.
30
**In the long run, equilibrium price & quantity always occur where ATC is at a minimum for a perfectly competitive firm.
31
The product price will be exactly equal to each firm’s point of minimum average total cost.
32
Perfectly elastic ◦ Level of output does not affect price in the long-
run.
33
Upward sloping as industry expands output.
34
Downward sloping as the industry expands output.
35
In the long run:◦ Productive efficiency occurs where P = minimum
ATC
◦ Allocative efficiency occurs where P = MC allocative efficiency implies maximum consumer and
producer surplus.
36
When a pharmaceutical company introduces a new drug, it typically owns the patent and can price and produce as a monopolist, earning economic profits.
When patent rights expire, firms pursuing economic profits enter the market for that drug.
Prices of these drugs typically drop 30-40 percent. ◦ Those lower prices increase efficiency and consumer
surplus.
37
top related