Ch 14 Firms in Perfectly Competitive Markets

A. Many buyers and sellersB. The goods are the same C. Buyers and sellers have a negligible

impact on the marketD. All participants are price makersE. Free entry and exit

1. Which of the following is not a characteristic of a “Perfectly Competitive Market”?

2. What is the goal of a perfectly competitive firm?

3. Change in Total Revenue / Change in Q = ?

4. In a perfectly competitive firm, the Price is always equal to …… and ….

5. If a firm is producing where MC>MR, should they increase or decrease Q?

6. A perfectly competitive firm will always maximize profit where …….=…….

7. On a graph, a perfectly competitive firm will always maximize profit at an output level where ……..and ……….intersect

8. On the graph for a perfectly competitive firm, the horizontal line represents the price, the _______ and the ________ because the firm is a price taker.

9. Because the firm’s ___________ curve determines the Q of the good the firm is willing to supply at any price, it is the competitive firm’s supply curve.

Q1

Q2

Q3Q4

Q5

10. At Q4, what is the relationship between MR and MC?

Q1

Q2

Q3Q4

Q5

11. A profit maximizing firm would choose to produce at which Q?

1. D2. Maximize profits3. Marginal Revenue4. MR and AR5. Decrease6. MR = MC7. MR and MC 8. AR and MR (or D) 9. Marginal Cost Curve 10. MR<MC11. Q3

Check your answers

When a gas station increases its prices , consumers may buy elsewhere

When a water co. increases its prices, consumers may decrease consumption, but have little or no choice on their supplier

……..these firms have………… Market power (price makers)

Intro

Different market structures shape a firm’s pricing and production decisions

Perfectly Comp

Monop Compet

OligopolyMonopoly

Goal: Analyze competitive firms and S curves w/

relation to its costs of production

Many buyers/sellers Each has negligible impact Price taker Identical (same) goods Free entry/exit = access to info./technology

Competitive (Perfectly) Market

Goal : Maximize profit TR – TC *can only change TR if change Q; can not

change Price (TR = P x Q)

Revenue of Competitive Firm

Average Revenue – how much a firm receives for a “typical” unit sold (see table 14-1)

TR/Q For all firms: AR = PIf TR = P x Q [ 10 = 5 x 2 ]And AR = TR / Q [5 x 2 / 2 ] …AR = 5 and P = 5 AR = P : true for all firms

Marginal Rev Change in TR from sale of each additional unit of output Change TR / Change in Q TR = P x Q and P is fixed …so if Q increases by 1 unit, then TR increase by (P)

dollars 1 unit x $5 = TR = $5 2 units x $5 = TR = $10 MR = Change TR / Change Q MR = $5 / 1 = $5 MR = $5 MR = P MR = P for competitive firm only (*b/c P is fixed)

When a competitive firm doubles the amount it sells, what happens to the P and its TR?

Quick Qz

How much to supply? What’s your goal? Table 14-2 : Profit Max level of output? Q ‘s 0-3 : what is MR MC relation? MR > MC : if increase Q = increase Profit Q’s 6-8 : what is MR MC relation? MR < MC: If decrease Q = increase Profit (*Q’s 6-8) why would you produce one more

unit when it cost you more than the revenue you will receive)

Profit Max Q : MR = MC

Profit Maximization and the Competitive Firm’s Supply Curve

The MC curve determines the Q the firm is willing to supply at any P…….

The MC curve is the Supply Curve for the firm

P = MR = AR = D

…..back to fig 14-1 Where S (MC) and D (P,MR,AR) meet is

equilibrium and profit max.

Fig 14-2

Draw a firm’s S and D (MC and MR) Identify profit max output Identify output where MR>MC; label it Q1 Identify output where MR<MC; label it Q2 Identify the Efficient Scale

“shut down” – temporary, short run decision to halt production

When? Why? If can not cover variable costs of production Shut down and lose all revenue…. …will still pay fixed costs ….but will save on variable costs Ex: a restaurant decides to close for lunch (its revenue was not covering variable costs

of servers, cooks, etc…)

Firm’s “short-run” decision

• Shut down if TR < VC• Or TR / Q < VC / Q [AR < AVC] • Since AR = P……• …..shut down if P < AVC • “Short Run shut down decision = P < AVC”• Draw it

See figure 14-3 Portion of the MC that is above AVC

Short Run Supply Curve

Airline example 1990’s Losing money but continue to operate Why? Cant recover “sunk” costs of airplanes As long as MR from each flight covers

variable costs – continue to operate

Fixed costs are “sunk” in short run

You bought a ticket to the playoff game for $7. You told your friend you would be willing to pay $10.

When you arrive, you realize you lost your ticket.

Should you buy another ticket or just go home?

As long as MB > or = MC ; buy another ticket

Quick Qz

Exit decision : if P < ATC Long Run decision – going out of business Calculate Profit : (P-ATC) x Q Graphing Profit and Loss