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Pure Competition
McGraw-Hill/Irwin
Chapter Objectives
The four basic market models Conditions for pure competition Profit maximization for competitive firms The competitive firm supply curve Industry entry and exit Industry cost structure Economic efficiency
9-2
Pure Competition
Very large numbers Standardized product Price takers Free entry and exit Perfectly elastic demand
Average revenue Marginal revenue Price
9-4
Pure Competition
$1179 Firms Demand Schedule (Average Revenue) Firms Revenue Data 1048 917
TR
QD TR
$0 131 262 393 524 655 786 917 1048 1179 1310
MR
] $131 ] 131 ] 131 ] 131 ] 131 ] 131 ] 131 ] 131 ] 131 ] 131
$131 0 131 1 131 2 131 3 131 4 131 5 131 6 131 7 131 8 131 9 131 10
393
262
D = MR = AR
131 2 4 6 8 10 12
9-5
Three questions:
Should the product be produced?
Profit Maximization
Two approaches Total revenue and total cost approach
Produce where TR-TC is greatest
0 1 2 3 4 5 6 7 8 9 10
$100 100 100 100 100 100 100 100 100 100 100
$100 190 270 340 400 470 550 640 750 880 1030
$0 131 262 393 524 655 786 917 1048 1179 1310
$-100 -59 -8 +53 +124 +185 +236 +277 +298 +299 +280
9-8
Break-Even Point (Normal Profit) Total Revenue, (TR) Maximum Economic Profit $299
P=$131
Break-Even Point (Normal Profit)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity Demanded (Sold)
$299
9-9
0 1 2 3 4 5 6 7 8 9 10
$100.00 50.00 33.33 25.00 20.00 16.67 14.29 12.50 11.11 10.00
$90.00 $190.00 85.00 135.00 80.00 113.33 75.00 100.00 74.00 94.00 75.00 91.67 77.14 91.43 81.25 93.75 86.67 97.78 93.00 103.00
$131 131 131 131 131 131 131 131 131 131
$-100 -59 -8 +53 +124 +185 +236 +277 +298 +299 +280
9-10
150 P=$131
MR = MC
MC MR = P ATC AVC
Economic Profit
100 A=$97.78 50
10
9-11
Output
Shut down if loss greater than fixed cost Produce if P > min AVC
9-12
150
MC
100 P=$81
ATC AVC MR = P
50
V = $75
10
9-13
Output
150
100
AVC MR = P
Short-Run Shut Down Point P < Minimum AVC $71 < $74
1 2 3 4 5 6 7 8 9 10
9-14
P=$71
50
Output
e P5 P4 P3 P2 P1 b a c d
Quantity Supplied
S
MC MR5 ATC AVC MR4 MR3 MR2 MR1
Quantity Supplied
9-17
Industry
Economic Profit
$111
ATC d AVC D
$111
8000
Competitive firm must take the price that is Established by industry supply and demand
9-19
Industry
S2
MR
40 40
D2 D1
100
80,000
90,000
100,000
An increase in demand temporarily raises price Higher prices draw in new competitors Increased supply returns price to equilibrium
9-21
Industry
S1
MR
40 40
D1 D3
100
80,000
90,000
100,000 P
A decrease in demand temporarily lowers price Lower prices drive away some competitors Decreased supply returns price to equilibrium
9-22
9-23
P1 P2 P3
$50 Z3 Z1 Z2
D3
D1 Q1 100,000 Q2 110,000
D2
Q3 90,000
9-24
S
P2 P1 P3
$55
$50 Y1 $40 Y2
Y3
D2 D3 D1 Q1 100,000 Q2 110,000
Q3 90,000
Allocative efficiency
P = MC
Maximum consumer and producer surplus Dynamic adjustments Invisible Hand revisited
9-26
Long-Run Equilibrium
Single Firm
P=MC=Minimum ATC (Normal Profit)
Market
S
MC ATC
Price
MR
Price
P D 0 Qf 0 Qe
Quantity
Quantity
D Q1 Q2 Quantity
Key Terms
pure competition pure monopoly monopolistic competition oligopoly imperfect competition price taker average revenue total revenue marginal revenue break-even point MR=MC rule short-run supply curve
long-run supply curve constant-cost industry increasing-cost industry decreasing-cost industry productive efficiency allocative efficiency consumer surplus producer surplus
9-30
Pure Monopoly
9-31