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MARKET TYPES
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•Perfect competition
•Monopoly
•Monopolistic competition
•Oligopoly
•Monopoly
•Monopolistic competition
•Oligopoly
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Perfect competition
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Perfect competition exists when
•Many firms sell an identical product to many buyers.
•There are no restrictions on entry into (or exit from) the market.
•Established firms have no advantage over new firms.
•Sellers and buyers are well informed about prices.
•Many firms sell an identical product to many buyers.
•There are no restrictions on entry into (or exit from) the market.
•Established firms have no advantage over new firms.
•Sellers and buyers are well informed about prices.
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A firm's marginal revenue
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is the change in total revenue that results from a one-unit increase in the quantity sold.
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price taker
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Each firm in perfect competition is a price taker.
A price taker is a firm that cannot influence the price of the good or service that it produces.
Market demand and market supply determine price.
A price taker is a firm that cannot influence the price of the good or service that it produces.
Market demand and market supply determine price.
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Profit-Maximizing Output (Q)
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A perfectly competitive firm seeks the level of output which maximizes profit.
To find this level of output, compare...
•Marginal Revenue & Marginal Cost
To find this level of output, compare...
•Marginal Revenue & Marginal Cost
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Marginal Analysis and the Supply Decision
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If marginal revenue exceeds marginal cost (if MR > MC), the extra revenue from selling one more unit exceeds the extra cost incurred to produce it.
Economic profit increases if output increases.
Economic profit increases if output increases.
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If marginal revenue is less than marginal cost
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(if MR < MC), the extra revenue from selling one more unit is less than the extra cost incurred to produce it.
Economic profit decreases if output increases.
Economic profit decreases if output increases.
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If marginal revenue equals marginal cost
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(if MR = MC), the extra revenue from selling one more unit is equal to the extra cost incurred to produce it.
Economic profit decreases if output increases or decreases, so economic profit is maximized.
Economic profit decreases if output increases or decreases, so economic profit is maximized.
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Firms choose the quantity of production that
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maximizes profit Occurs where... MC = MR
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Short-Run Equilibrium
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Market demand and market supply determine the market price.
Each firm determines Qs where MC=MR
In the Short-Run, Profit can be
•Positive
•Negative
•Zero
Each firm determines Qs where MC=MR
In the Short-Run, Profit can be
•Positive
•Negative
•Zero
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Short-Run Equilibrium in Good Times
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In the short-run equilibrium that we've just examined, Dave made zero economic profit.
Although such an outcome is normal, economic profit can be positive or negative in the short run.
The next slides illustrate a short-run equilibrium when the firm makes a positive economic profit.
Although such an outcome is normal, economic profit can be positive or negative in the short run.
The next slides illustrate a short-run equilibrium when the firm makes a positive economic profit.
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Shutdown Decisions
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If a firm is incurring an economic loss, they may stay open earning a loss, or shutdown.
If they shutdown
•Variable Costs = 0
•Economic Loss = Fixed Costs
If they shutdown
•Variable Costs = 0
•Economic Loss = Fixed Costs
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A firm will continue to produce as long as the loss from staying open is less than the loss from shutting down.
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If they stay open
•Variable Costs > 0
•Fixed Costs still present
•Economic Loss = TC - Total Revenue
•Variable Costs > 0
•Fixed Costs still present
•Economic Loss = TC - Total Revenue
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The firm's shutdown point occurs when
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the price equals the minimum average variable cost.
At this point, the amount of loss = their fixed costs.
-When Price < AVC, the firm should shut down
-When Price > AVC, the firm should stay open
At this point, the amount of loss = their fixed costs.
-When Price < AVC, the firm should shut down
-When Price > AVC, the firm should stay open
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The Firm's Short-Run Supply Curve
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A firm's short-run supply curve shows how the firm's profit-maximizing quantity varies as the price (MR) varies, ceteris paribus.
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<Entry and Exit
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In Perfect Competition...
•There are no barriers to entry or exit
•Firms respond to profits and losses
•Profit signal entry of new firms
•Losses signal exit of firms
•There are no barriers to entry or exit
•Firms respond to profits and losses
•Profit signal entry of new firms
•Losses signal exit of firms
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In perfect competition, the marginal revenue is the same as:
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Price
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If the average total cost curve is above the demand curve, then this firm is:
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having economic losses
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A firm in perfect competition earns profit if:
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price is greater than average total cost
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In the short run, the firm should:
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Operate if price > average variable cost
*As long as price is higher than the variable cost, the firm can cover variable costs and put some money towards covering fixed costs. The firm will be operating at a loss but the loss will be less than it would be if the firm shut down. In the long run, all costs are variable so the firm might be able to adjust the cost structure and continue operations.
*As long as price is higher than the variable cost, the firm can cover variable costs and put some money towards covering fixed costs. The firm will be operating at a loss but the loss will be less than it would be if the firm shut down. In the long run, all costs are variable so the firm might be able to adjust the cost structure and continue operations.
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A buyer or seller that is unable to affect the market price is called a
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price taker
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What is the term given to a cost that has already been paid and cannot be recovered?
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Sunk costs
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Which of the following is a characteristic of a perfectly competitive market?
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There are large numbers of buyers and sellers.
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Long-run equilibrium in perfect competition results in
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both productive and allocative efficiency
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In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to __________ and the market price to
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shift rightward, decrease
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