pure competition 6 lecture market structure continuum four market models pure competition
TRANSCRIPT
![Page 1: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/1.jpg)
Pure Competition
6LECTURE
![Page 2: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/2.jpg)
Market Structure Continuum
FOUR MARKET MODELS
Pure Competition
![Page 3: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/3.jpg)
Market Structure Continuum
PureCompetition
FOUR MARKET MODELS
Pure Monopoly
![Page 4: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/4.jpg)
Market Structure Continuum
PureCompetition
PureMonopoly
FOUR MARKET MODELS
Imperfect Competition
![Page 5: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/5.jpg)
Market Structure Continuum
PureCompetition
PureMonopoly
FOUR MARKET MODELS
Monopolistic Competition
![Page 6: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/6.jpg)
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition
FOUR MARKET MODELS
Oligopoly
![Page 7: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/7.jpg)
Market Structure Continuum
PureCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
FOUR MARKET MODELSPure Competition:• Very Large Numbers• Standardized Product• “Price Takers”• Free Entry and Exit
![Page 8: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/8.jpg)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
Perfectly Elastic DemandPrice Taker Role
Total RevenueAverage Revenue
Marginal Revenue
For example...
![Page 9: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/9.jpg)
$131 131131131131131131131131131131
0 1 23456789
10
$ 0131262393524655786917
104811791310
$131131131131131131131131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]]]]]]]]]
![Page 10: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/10.jpg)
$131 131131131131131131131131131131
0 1 23456789
10
$ 0131262393524655786917
104811791310
$131131131131131131131131131131
Product Price (P)(Average Revenue)
TotalRevenue (TR)
MarginalRevenue (MR)
QuantityDemanded (Q)
DEMAND AS SEEN BY APURELY COMPETITIVE SELLER
]]]]]]]]]]
GraphicallyPresented…
![Page 11: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/11.jpg)
DEMAND, MARGINAL REVENUE, AND TOTALREVENUE IN PURE COMPETITION
TR
D = MR
1 2 3 4 5 6 7 8 9 10
1179
1048
917
786
655
524
393
262
131
0
Pri
ce
an
d r
ev
enu
e
Quantity Demanded (sold)
![Page 12: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/12.jpg)
SHORT RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
The Decision Rule:Produce in the short-run if it can realize
1- A profit (or)2- A loss less than its fixed costs
The Decision Process:•Should the firm produce?•What quantity should be produced?•What profit or loss will be realized?
![Page 13: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/13.jpg)
SHORT RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
The Decision Rule:Produce in the short-run if it can realize
1- A profit (or)2- A loss less than its fixed costs
The Decision Process:•Should the firm produce?•What quantity should be produced?•What profit or loss will be realized?
AppliedGraphically…
![Page 14: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/14.jpg)
TotalCost
0 1 23456789
10
TotalProduct
TotalFixedCost
TotalVariable
CostTotal
Revenue Profit
$ 100 100 100100100100100100100100100
$ 090
170240300370450540650780930
$ 100190270340400470550640750880
1030
Price: $131
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0131262393524655786917
104811791310
Can you see the
profit maxim
ization?
![Page 15: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/15.jpg)
TotalCost
0 1 23456789
10
TotalProduct
TotalFixedCost
TotalVariable
CostTotal
Revenue Profit
$ 100 100 100100100100100100100100100
$ 090
170240300370450540650780930
$ 100190270340400470550640750880
1030
Price: $131
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
TOTAL REVENUE-TOTAL COST APPROACH
$ 0131262393524655786917
104811791310
Graphing Total
Cost & Revenue
![Page 16: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/16.jpg)
$1,8001,7001,6001,5001,4001,3001,2001,1001,000 900 800 700 600 500 400 300 200 100 0
To
tal r
eve
nu
e a
nd
to
tal c
ost
TotalRevenue
TotalCost
MaximumEconomic
Profits$299
Break-Even Point(Normal Profit)
Break-Even Point(Normal Profit)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
TOTAL REVENUE-TOTAL COST APPROACH
![Page 17: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/17.jpg)
SHORT RUN PROFIT MAXIMIZATION
Two Approaches...First:Total-Revenue -Total Cost Approach
Three Characteristics:• The rule applies only if producing
is preferred to shutting down• Rule applies to all markets• Rule can be restated P=MC
Second:Marginal-Revenue -Marginal Cost
Approach
MR = MC Rule
![Page 18: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/18.jpg)
AverageTotalCost
0 1 23456789
10
TotalProduct
AverageFixedCost
AverageVariable
Cost
Price =MarginalRevenue
TotalEconomicProfit/Loss
$100.00
50.00 33.3325.0020.0016.6714.2912.5011.1110.00
$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
$ 131131131131131131131131131131
MarginalCost
90807060708090
110130150
Thesame profitmaximizing
result!
![Page 19: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/19.jpg)
AverageTotalCost
0 1 23456789
10
TotalProduct
AverageFixedCost
AverageVariable
Cost
Price =MarginalRevenue
TotalEconomicProfit/Loss
$100.00
50.00 33.3325.0020.0016.6714.2912.5011.1110.00
$90.0085.0080.0075.0074.0075.0077.1481.2586.6793.00
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
- $100- 59
- 8+ 53
+ 124+ 185+ 236+ 277+ 298+ 299+ 280
MARGINAL REVENUE-MARGINAL COST APPROACH
$ 131131131131131131131131131131
MarginalCost
90807060708090
110130150
Graphically
![Page 20: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/20.jpg)
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
Profit Maximization Position
![Page 21: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/21.jpg)
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
Economic Profit
$131.00
$97.78
MARGINAL REVENUE-MARGINAL COST APPROACH
MR = MCOptimumSolution
Profit Maximization Position
![Page 22: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/22.jpg)
The MR=MC rule still applies
If the price is lowered from $131 to $81
…But the MR = MC point changes
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position
![Page 23: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/23.jpg)
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MRAVCATC
Economic Loss
$81.00$91.67
MARGINAL REVENUE-MARGINAL COST APPROACH
Loss Minimization Position
![Page 24: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/24.jpg)
$200
150
100
50
0
Co
st a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
MC
MR
AVCATC
$71.00
MARGINAL REVENUE-MARGINAL COST APPROACH
Short-Run Shut Down Point
Minimum AVCis the Shut-Down
Point
![Page 25: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/25.jpg)
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
PriceQuantitySupplied
Maximum Profit (+)Or Minimum Loss (-)
Observe the impact upon profitability as price is changed
$151 131 111 91 81 71 61
10987600
$+480+299
+138 -3
-64 -100 -100
![Page 26: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/26.jpg)
Co
st a
nd
Rev
enu
e, (
do
llar
s) MC
MR1
AVC
ATC
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run Supply
Do notProduce –
Below AVC
![Page 27: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/27.jpg)
Co
st a
nd
Rev
enu
e, (
do
llar
s)MC
MR1
MARGINAL REVENUE-MARGINAL COST APPROACH
Quantity Supplied
MR2
MR3
MR4
MR5
P1
P2
P3
P4
P5
Q2 Q3 Q4 Q5
Marginal Cost & Short-Run SupplyYields theShort-Run
Supply Curve
Supply
NoProductionBelow AVC
![Page 28: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/28.jpg)
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
AVC2
MC2
Higher Costs Move theSupply Curve to the LeftC
ost
an
d R
even
ue,
(d
oll
ars)
MC1
AVC1
Quantity Supplied
S1
S2
![Page 29: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/29.jpg)
MARGINAL REVENUE-MARGINAL COST APPROACH
Marginal Cost & Short-Run Supply
AVC2
MC2
Lower Costs Movethe Supply Curve
to the Right
Co
st a
nd
Rev
enu
e, (
do
llar
s)MC1
AVC1
Quantity Supplied
S1
S2
![Page 30: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/30.jpg)
P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MC’s
IndustryFirm(price taker)
EconomicProfit
$111$111
SHORT RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” it’sPrice from the Industry Equilibrium
![Page 31: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/31.jpg)
P
Q
S=MC
AVC
ATC
8
D
P
Q8000
D
S= MC’s
IndustryFirm(price taker)
EconomicProfit
$111$111
SHORT RUN COMPETITIVE EQUILIBRIUM
The Competitive Firm “Takes” it’sPrice from the Industry Equilibrium
How about thelong-run?
![Page 32: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/32.jpg)
PROFIT MAXIMIZATION IN THE LONG-RUN
Goal...
Price = Minimum ATC
Zero Economic Profit Model
![Page 33: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/33.jpg)
Temporary Profits and the ReestablishmentOf Long-Run Equilibrium
S1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
MR
D1
![Page 34: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/34.jpg)
An increase in demand increases profits…
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
EconomicProfits
S1
![Page 35: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/35.jpg)
New Competitors increase supply and lowerPrices decrease economic profits
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
Zero EconomicProfits
S1
S2
![Page 36: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/36.jpg)
Decreases in demand, Losses and the Reestablishment of Long-Run Equilibrium
S1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D1
MR
![Page 37: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/37.jpg)
A decrease in demand creates losses…
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
EconomicLosses
S1
![Page 38: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/38.jpg)
MR
D1
MCATC
P
Q100
P
Q100,000
IndustryFirm(price taker)
$60
50
40
$60
50
40
PROFIT MAXIMIZATION IN THE LONG-RUN
D2
Return to ZeroEconomic Profits
S1
S3
Competitors with losses decrease supply andprices return to zero economic profits
![Page 39: Pure Competition 6 LECTURE Market Structure Continuum FOUR MARKET MODELS Pure Competition](https://reader036.vdocuments.us/reader036/viewer/2022062304/56649e8d5503460f94b90c86/html5/thumbnails/39.jpg)
P MR
Q
MCATC
Quantity
Pri
ce
Price = MC = Minimum ATC(normal profit)
LONG-RUN EQUILIBRIUM FOR A COMPETITIVE FIRM