12/2/2009. Market Structures. pure (perfect) competition monopoly monopolistic competition. oligopoly. Characteristics of Pure Competition

Transcription

1 / (Dollars) (Dollars) 12/2/29 Market Structures pure (perfect) competition monopoly monopolistic competition oligopoly Characteristics of Pure Competition 1. Market has SO MANY firms that no single firm has control over market price (price takers). ie. farmers, commodities (gas, rubber, nuts, etc.) Output Decisions for a Purely Competitive Firm As pricetakers have no control over market price, their decisions are limited to determining the quantity they will produce. 2. Products are homogeneous (aka: fungible) fungible: interchangeable; in legal terms, something that can be substituted for a like measure or amount of the same thing, as one bushel of apples for another, in order to satisfy an obligation. 3. Complete freedom of entry and exit from industry. 4. Consumers know the prices charged by each firm. Naturally, the quantity produced (output) will be set at a level where profit is maximized. Two methods of determining profit maximization: 1. / Total Approach 2. / Approach / Total Approach Total / Approach Output (units Produced) Total Total Profit Quantity Total Total Profit will be maximized where total revenue is farthest above total cost. Profit / Approach First, a word about marginal revenue MR = P = D : The extra revenue earned per unit produced. As the price is not affected by output, the extra revenue per unit will be the same. Thus, the price IS the marginal revenue! This curve also serves as the demand curve! (price / quantity) 1

2 (Dollars) Price / (Dollars) Price (Dollars) (Dollars) Price 12/2/29 So What s? : refers to the extra revenue earned by producing each extra unit. (ie. What do we earn if we make one more unit.) Perfectly Competitive Firm 2 MR = D This firm is just ONE player within a VERY large industry! MR = Change in Total Change in Quantity TR MR = Q As such, its output represents a virtually irrelevant quantity in comparison to the output of the entire industry. Thus, its output cannot possibly influence market price. Price will remain the same regardless of how much output this firm decides to produce. Market Millions of Units This curve also serves as the demand curve! (price / quantity) S D Need a Metaphor? Same thing!!! Perfectly Competitive Firm 2 15 MR = D 1 5 Market S If we step back far enough from the earth, we can clearly see that it is round. D If we step back far enough from a demand curve, we can clearly see that it is sloped. Yet if we focus on any one small piece of land, we see a flat surface! Millions of Units Yet if we focus on just one small piece of this curve, we will see a flat curve! Yup! For a perfectly competitive firm, the demand curve will be a flat horizontal line! 2. / Approach The small quantity produced by this one firm cannot influence overall supply, and thus cannot alter the quantity demanded. It is a price taker! Demand Curve for A Competitive Industry Quantity Demand Approach Quantity Profit Profit will be maximized where marginal revenue equals marginal cost. 2

3 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 2. / Approach marginal profit Approach marginal loss Profit Quantity Profit Profit will be maximized where marginal revenue equals marginal cost. Profit will always be maximized where marginal revenue equals marginal cost. The distance above average total cost indicates pure! After enough firms enter into the industry, price (marginal revenue) starts to drop! Naturally, this cuts into the profits earned by each firm! After enough time, so many firms will enter the industry that price will fall to the point where no economic profits are made! This is called the break even point! Where marginal revenue equals average total costs. Sadly, external factors may cause the price to fall, or costs to rise, until price (marginal revenue) falls below average total costs! : The total profits earned when marginal revenue crosses marginal costs at a point above average total costs. Shut Down Point: Where marginal revenue equals average variable costs. 3

4 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 4

5 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 5

6 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 : until there are no more economic profits left! Did you notice the Supply Curve in there? The ShortRun Supply Curve for a Competitive Firm No?! Well then take another look! The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm 6

7 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm 7

8 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm 8

9 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm The ShortRun Supply Curve for a Competitive Firm So why would a firm CHOOSE to operate at a loss?! 1. They are still making more than their variable costs! Supply After all, if they shut down, they would STILL need to pay their fixed costs. Ergo, any revenue above the variable costs could be put towards the fixed costs. Hence, in the short run the supply curve (the various quantities supplied at various prices) is represented by the MC curve above the AVC curve!???? 2. Eventually good times will return! Some firms will definitely leave the industry. This will cause market supply to fall and market price to rise. 3. They may in fact be earning accounting profits!!! profits consider opportunity costs as well! High opportunity costs may be responsible for the economic loss. 9

10 / (Dollars) / (Dollars) / (Dollars) / (Dollars) / (Dollars) 12/2/29 Remember In the LongRun a firm will not operate in this area, as they will not choose to operate at a loss if they have another alternative. In the longrun firms will not maintain production when incurring a loss just so they can pay towards their fixed costs, because in the long run no costs are fixed! The shortrun supply curve is actually the curve! As long as it s above the curve. In review supply curves for a firm. Whereas the longrun supply curve is only that part of the curve that is above the Total curve. Supply Supply 1