A. Technology and Production Function B. C i ii i Cost
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A. Technology and Production Function A. Technology and Production Function C i i i i C i i i i B. Cost Minimization B. Cost Minimization C. Profit Maximization and Supply C. Profit Maximization and Supply 1
A. Technology and Production Function B. C i ii i Cost
Microsoft PowerPoint - 103Micro_Part3C1.pptxA. Technology and
Production FunctionA. Technology and Production Function C i i i i
C i i i iB. Cost MinimizationB. Cost Minimization
C. Profit Maximization and SupplyC. Profit Maximization and
Supply
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Part 3. Part 3. The Theory of Choice II: The Theory of Choice II:
Producer TheoryProducer Theory
C. C. Profit Maximization & Profit Maximization & Profit
Maximization & Profit Maximization &
SupplySupplySupplySupply
1.1. Perfect CompetitionPerfect Competition 2.2. Profit
MaximizationProfit Maximization 3.3. ShortShort--Run SupplyRun
Supply & Competitive Equilibrium& Competitive
Equilibrium
LL R S l & C titi Eq ilib iR S l & C titi Eq ilib i4.4.
LongLong--Run Supply & Competitive EquilibriumRun Supply &
Competitive Equilibrium 5.5. ZeroZero--Profit ConditionProfit
Condition 6.6. Producer SurplusProducer Surplus6.6. Producer
SurplusProducer Surplus
Perloff (2014, 3e, GE), Chap. 8, Sections 9.1-9.2 2
Part 3C. Part 3C. Profit Maximization & SupplyProfit
Maximization & Supply
1.1. Perfect CompetitionPerfect CompetitionPerfect
CompetitionPerfect Competition
Perfectly Competitive MarketsPerfectly Competitive Markets
Perfectly Competitive MarketsPerfectly Competitive Markets
PricePrice--Taking BehaviorTaking Behavior Why Perfect Competition
Is ImportantWhy Perfect Competition Is ImportantWhy Perfect
Competition Is ImportantWhy Perfect Competition Is Important
3Perloff (2014, 3e, GE), Section 8.1. 2015.3.5
Perfectly Competitive MarketsPerfectly Competitive Markets
Definition: Definition: Perfectly Competitive MarketsPerfectly
Competitive Markets A perfectly competitive market structure has A
perfectly competitive market structure has
the following properties: PC1PC1 P i T k P i T k PC1:PC1: Price
Takers Price Takers There are many buyers and sellers in the
market. There are many buyers and sellers in the market. No one can
significantly affect the market price. No one can significantly
affect the market price.
All buyers and sellers are price takers.All buyers and sellers are
price takers.
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PC2: PC2: Homogeneous Products Homogeneous Products gg Consumers
believe that all firms in the market sell Consumers believe that
all firms in the market sell identicalidentical
products.products.identicalidentical products.products. PC3: PC3:
Perfect Information Perfect Information Buyers and sellers know the
prices Buyers and sellers know the prices charged by charged by
firms. firms.
If firms have perfect information about the knowledge of
technology, then all firms have identical cost structures.
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PC4: PC4: Low Transaction CostsLow Transaction Costs44 The expenses
of finding a trading partner and The expenses of finding a trading
partner and making a trade for a good or service other than
themaking a trade for a good or service other than themaking a
trade for a good or service other than the making a trade for a
good or service other than the price paid for that good or service
are low.price paid for that good or service are low. PC5: PC5:
Perfect Mobility of FactorsPerfect Mobility of FactorsPC5: PC5:
Perfect Mobility of FactorsPerfect Mobility of Factors Factors are
perfectly mobile among alternative uses.Factors are perfectly
mobile among alternative uses. PC6:PC6: No Externalities &
Public GoodsNo Externalities & Public Goods There are no
external costs or benefits in There are no external costs or
benefits in consumption or production.consumption or
production.
All goods are privateAll goods are privateAll goods are private.
All goods are private. PC7: PC7: Free Entry & ExitFree Entry
& Exit FiFi f l t d itf l t d it th k tth k tFirms Firms freely
enter and exit freely enter and exit the market.the market.
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PricePrice--Taking BehaviorTaking Behavior
A Competitive FirmA Competitive Firm a firm is a competitive firm
if it is a price price a firm is a competitive firm if it is a
price price
takertaker. A fi t i ifi tl ff t th k tAny firm cannot
significantly affect the market price for its output or the prices
at which it buys it i tits inputs. Even if some of those conditions
of perfectly competitive markets are violated, firms and consumers
may still be price takers.
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Q: Q: Why would a competitive firm be a price taker?Why would a
competitive firm be a price taker?QQ y p f py p f p
A: A: It has no choice.It has no choice. I titi k t h f d dIn a
competitive market, each face a demand curve that is horizontal at
the market price.
Given the market price, the firm can sell as much as it wants at
that price, so it has no incentive to lower its price. However, a
small increase in price results in its demand falling to zero, so
it has no incentive to raise its price.
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Derivation of A Competitive Derivation of A Competitive Derivation
of A Competitive Derivation of A Competitive Firm’s Demand
CurveFirm’s Demand Curve
Q:Q: Are the demand curved faced by individual Are the demand
curved faced by individual competitive firms actually
flat?competitive firms actually flat?competitive firms actually
flat?competitive firms actually flat?
The Residual Demand CurveThe Residual Demand Curve The residual
demand curve, Dr(p),that a single firm faces is the market
demandmarket demand, D(p), minus the supply of the other
firmssupply of the other firms in the market, So(p).
( ) ( ) ( )r oD D S( ) ( ) ( ) r oD p D p S p
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Figure: Figure: Residual Demand CurveResidual Demand Curvegg
The residual demand curve that the firm faces is much
flatterflatter than the market demand curve.ee e e de d cu
ve.
10Perloff (2014, 3e, GE), Figure 8.1, p. 272.
The Elasticity of the Residual Demand The Elasticity of the
Residual Demand yy CurveCurve If there are n identical firms in the
market, theIf there are n identical firms in the market, the
elasticity of demand facing firm i is derived as
follows.follows.
( ) ( ) ( ) r oD p D p S p
( ) ( ) ( )
r odD p dD p dS p dp dp dp
0( ) ( ) ( )
r o QdD p p dD p p Q dS p p
dp dp dp
( ) ( ) ( )
Qp p p p Q p p dp q dp Q q dp Q q
= n = n – 1
D p D p S pe ne n e n
( 1)i o
The elasticit of the resid al demand c r e is
, , , , ,( 1) < < i o D p D p S p D p D pe ne n e ne e
+ The elasticity of the residual demand curve is much
“higher”higher” than the market elasticity. Th id l d d h h fi f
iThe residual demand curve that the firm faces is much
“flatter”flatter” than the market demand curve.
e.g., , ,1.1, =3.1, and 78,o D p S pe e n
( )i o , , ,( 1) i o
D p D p S pe ne n e
= 78 ( 1 1) 77 3 1 = 324 5= 78 (–1.1) – 77 3.1 = –324.5 The
residual demand curve that the firm faces is h i t l if
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Why Perfect Competition Why Perfect Competition Why Perfect
Competition Why Perfect Competition is Important?is
Important?
Many markets can be reasonably described as Many markets can be
reasonably described as
competitivecompetitive.competitivecompetitive.
Many markets have many or all of the properties of a perfectly
competitive marketa perfectly competitive market.
e.g., agricultural markets & other commodity markets, stock
exchanges retail and wholesale markets buildingstock exchanges,
retail and wholesale markets, building construction markets and
others
We can use the Demandthe Demand--Supply Model Supply Model toWe can
use the Demandthe Demand Supply Model Supply Model to accurately
predict the impacts of changes in economic environment to analyze
the effects ofeconomic environment to analyze the effects of
government policies.
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A perfectly competitive market has many A perfectly competitive
market has many A perfectly competitive market has many A perfectly
competitive market has many desirable properties. desirable
properties.
Economists use this model as the ideal againstEconomists use this
model as the ideal against which real-world markets are
compared.
Small Number of Firms:Small Number of Firms: Monopoly &
OligopolySmall Number of Firms:Small Number of Firms: Monopoly
& Oligopoly Differentiated Products: Differentiated Products:
Monopolistic C i iCompetition Limited Entry & Exit: Limited
Entry & Exit: Entry Barriers & Regulations Imperfect
InformationImperfect Informationpp High Transaction CostsHigh
Transaction Costs Imperfect MobilityImperfect MobilityImperfect
MobilityImperfect Mobility Externalities & Public
GoodsExternalities & Public Goods
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